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ombudsman news

issue 29

July 2003

banking and mortgages: "voluntary concessions"

Broadly, the rights and duties of the firm and its customer are laid down in the contract between them. For example, a mortgage contract will say how much a mortgage customer must pay the firm each month. And the terms of a current account contract may say that customers must wait for the cheques they pay in to clear, before they can withdraw the money.

But sometimes the firm makes a "voluntary concession" - treating the customer more favourably than the terms of the contract require. A customer in financial difficulties, for example, may ask the firm for more leeway than the contract terms provide. Or a customer may ask the firm to conduct the account in a way that is more convenient for the customer than the contract terms provide. If the firm agrees to such requests, is it then obliged to stick with the "voluntary concession" or can it decide to go back to the original contract terms-

When we look at complaints involving "voluntary concessions", we have to take account of legal rules before we decide on fair and reasonable outcomes.

How does the law treat situations like this- Broadly:

  • The contract would only be treated as "varied" where the customer has provided the firm with a payment or other benefit in return. Where this was the case, the customer can insist that the firm sticks to the variation.
  • But the more usual situation is that customers simply take advantage of the "voluntary concession" and organise their affairs as if it will go on indefinitely.
  • Even then, the firm can go back to the terms of the original contract if it gives the customer notice that it intends to do this. And the customer has no legal right to prolong the concession.
  • But the firm cannot undo any advantage the customer has had from the concession - assuming the customer has actively relied on the concession. It can only insist again on its normal legal rights for the period after it has given notice.

The following case studies illustrate how this works in practice.

case studies - banking and mortgages: "voluntary concessions"

concession - business customer could withdraw against "uncleared effects"

H Ltd had a current account with the firm. As normal with current accounts, the terms said that H Ltd could only make withdrawals against cleared funds. So in the case of cheques, for example, H Ltd had to wait six working days after paying in a cheque before it could treat the funds as "cleared".

Not surprisingly, it suited H Ltd's cash flow better to be able to treat the cheques as "cleared" as soon as they were paid in. As a concession, the firm allowed this. However, it withdrew the concession when a large cheque "bounced". H Ltd complained about this, and about the fact that the firm had not said that it would withdraw the concession. H Ltd only found out about it after the firm had returned one of H Ltd's own cheques unpaid. This had caused H Ltd some embarrassment, as it had sent the cheque to one of its regular suppliers.

complaint upheld
In allowing H Ltd to make withdrawals against uncleared funds, the firm had granted a concession. H Ltd had no contractual right to enjoy this concession indefinitely and the firm was entitled to withdraw it, legitimately exercising its commercial judgement.

The firm had also been within its rights to return H Ltd's cheque unpaid, even if H Ltd had written the cheque before learning that the firm had withdrawn the concession. This was because:

  • the concession could not be expected to apply to cheques that bounced before H Ltd had made a withdrawal against them; and
  • the available balance on the account, including other uncleared cheques whose fate was not yet known, did not cover H Ltd's cheque.

But the firm should still have informed H Ltd as soon as it withdrew the concession. H Ltd needed to know, for obvious reasons, that it could no longer withdraw against uncleared cheques, and it suffered some inconvenience through only belatedly discovering this. We awarded £100 compensation for that inconvenience.

concession - lower mortgage payments

Mr T became unable to afford the full monthly mortgage payment for his house and he fell into arrears. The firm agreed not to seek repossession for the time being if he paid it at least 75 percent of the full monthly (interest only) payment.

When it made this concession, the firm did not expressly state how it would treat the 25 percent balance. In fact, the firm added it to the mortgage account as "unpaid arrears" while the concession continued. This became apparent in due time on Mr T's annual mortgage statement.

After around two years, when Mr T's situation had improved, the firm withdrew the concession, asking Mr T to start meeting full monthly payments again. Mr T had no problem with this. However, he strongly disagreed with the firm's actions in adding the 25 percent that remained unpaid during the period of the concession. He said that the firm's earlier "silence" on this matter meant that it could not now decide to do this.

complaint rejected
We agreed with Mr T that it would have been better if the firm had spelt out from the start how it intended to treat the 25 percent balance. But although it had not done this, the acid test was whether it would now be unfair to require Mr T to pay this (within a reasonable time scale).

In agreeing to make a concession, the firm had stipulated that Mr T should make payments of "at least 75 percent" to forestall repossession. We could see no good reason why Mr T should have supposed that the firm was forgoing the balance forever. And, by his own account, Mr T could not have afforded to pay more than 75 percent for a certain period.

Taking all this into account, we decided not to uphold the complaint.

Walter Merricks, chief ombudsman

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.