The power to settle financial complaints.
The power to settle financial complaints.
ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.
The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.
September 2001
We continue to receive complaints about cases where a firm:
For accounts designed to operate mainly through branches, the Banking Code says it is enough if the firm:
For accounts designed to operate by post, the Banking Code requires the firm to send customers notification of interest rate cuts, at the time of the cuts. We would prefer it if this requirement applied to all accounts. But we do not write the Code.
The Code also contains special provisions about accounts that are "superseded" – because the account is no longer open to new customers, or the firm does not actively promote it. But what constitutes promotion of an account is open to dispute, and the problem of downgraded interest is not confined to superseded accounts.
Recently we considered some test cases about a particular deposit account. One of our adjudicators upheld the complaints. The firm concerned decided to settle rather than to "appeal" to an ombudsman. One of the customers showed the adjudicator’s decision to the press, but some of the resulting reports rather missed the point.
As a result, we received a significant number of requests for clarification – particularly from firms. This article explains one of the key issues on which the test cases turned, but it is important to remember that the test cases did not reach the stage of an ombudsman’s decision.
Contrary to some reports, the adjudicator’s conclusions were not that interest rates must always be linked to Bank of England base rate, nor that a firm must send personal notification to customers if it cuts the rate for a valid reason, specified in the account terms. The adjudicator’s conclusions were:
The interest variation clause allowed the firm to change interest rates in line with movements in general interest rates. Interest rates generally were moving down but the firm had cut the rate by vastly more. The firm should pay interest, up until the date the complainant discovered the position, at the rate it would have paid if it had maintained the differential between its rate and the Bank of England base rate, instead of increasing it.
In February 2000, the Office of Fair Trading published its views about how the Unfair Terms in Consumer Contract Regulations apply to variable interest rates on mortgages and savings products where the customer is "locked in" by a charge or notice period.
But the Regulations are not confined to cases where the customer is "locked in". In particular, they also deal with cases where the firm changes the interest rate without telling the customer. Account terms that allow this are likely to be unfair, unless the reason for the change was a valid one and was spelled out in the account terms.
So here is a summary of some ways in which the Regulations might affect deposit and savings accounts, and the notifications firms give to their customers. It covers more points than those on which the recent test cases turned. But it does not claim to cover every issue, or every factor that might be taken into account in deciding what is fair.
The Regulations implement European Directive 93/13/EEC and apply to consumer contracts entered into from 1 July 1995. Any written term must be in plain, intelligible language. If there is any doubt about the meaning, the interpretation most favourable to the consumer prevails.
An "unfair term" is not binding on the consumer. An "unfair term" is one that, contrary to the requirement of good faith, disadvantages the consumer because of a significant imbalance in the parties’ rights and obligations. This is assessed in the light of the subject matter of the contract, and the circumstances when the contract was entered into.
The Regulations include a "grey list" of terms that are likely to be unfair. These include terms that enable a supplier to alter the contract unilaterally (which is what a financial firm does when it alters a variable interest rate) without a valid reason that is specified in the contract. But this is subject to a qualification.
The Regulations say that this item on the "grey list" does not prevent a financial firm reserving the right to vary interest rates, or charges [,] without notice where there is a valid reason – provided that the firm is required to inform the customer at the earliest opportunity and that the customer is free to close the account immediately.
The "[,]" in the previous paragraph indicates a comma that appears in the original French text of the European Directive, but does not appear in the Regulations. So there is a debate about whether a valid reason is required just for varying charges or also for varying interest rates. But legislation based on European Directives is supposed to be interpreted in a way that is consistent with the purposes of the Directive. And many legal commentators consider that this provision does require the reason for varying an interest rate to be a valid one.
If the reason for the variation (even if valid) is not specified in the contract, then the firm must be subject to a requirement to inform the customer at the earliest opportunity. That could be interpreted as indicating a more specific form of notification than putting notices in branches and in newspapers – the Banking Code’s minimum requirement for branch-based accounts.
So what could it mean in practice? Cases might turn on the following issues:
