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We continue to receive complaints about cases where a firm:
‘downgraded’ a deposit or savings account, by cutting the interest
rate more than can be justified by any general fall in interest
rates; and
did not send notification of the interest rate cut, at the time,
to customers with the relevant account.
For
accounts designed to operate mainly through branches, the Banking
Code says it is enough if the firm:
puts notices in branches and newspapers;
provides a telephone helpline; and
once a year, sends customers
a summary of the interest rates on its accounts.
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‘superseded’ – because the account is no longer open to new customers,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downgraded interest is not confined to superseded accounts.
recent
developments
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 account terms listed various valid reasons why the interest
rate might be reduced. If the firm had reduced the interest rate
for one of those reasons, it would have been sufficient for it
to have provided the notifications required by the Banking Code.
However, the firm’s actual reason was not one of those listed.
This meant that, under the Unfair Terms in Consumer Contracts
Regulations, the firm was required to inform the customer at the
earliest opportunity – and ‘inform’ implied some direct communication.
The firm did not send the customers any direct communication at
the earliest opportunity.
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.
unfair
terms in Consumer Contracts Regulations
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.
in
practice
So what could it mean in practice? Cases might turn on the following
issues:
Did the interest variation clause specify the reasons for which
it could be used? If it did, was it actually used for one of those
specified reasons? And if it was, was the reason a valid one?
If it was used for a reason that was not specified, did the clause
give the firm power to vary the interest rate for other (unspecified)
reasons? If it did not, or if the clause was unclear, the firm
probably had no power to change the rate.
If the clause gave the firm power to vary the interest rate for
other (unspecified) reasons, what was the actual reason? Was that
a valid reason? Was the firm contractually bound to inform the
customer promptly?
If the firm was not bound to inform the customer promptly, a change
for a reason not specified in the contract was probably unfair.
If the firm was bound to inform the customer promptly,
was the customer free to close the account without notice?
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