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ombudsman news

issue 32

October 2003

banking case round-up

a selection of some of the banking-related complaints we have dealt with recently

business loan - whether firm entitled to make early repayment charge

Mrs L borrowed £50,000 from the firm to buy a café. The loan was repayable over 10 years, at a fixed rate of interest. Unfortunately, the business never did very well and three years after it opened, Mrs L decided to close it down and pay off the balance of the loan.

When she asked the firm for confirmation of how much she owed, she was shocked to learn she would have to pay an early repayment charge of £5,000. She had not allowed for this in her calculations.

She complained to the firm, saying it was not within its rights to make the charge. The firm told her the loan agreement she had signed made it clear that a charge was payable if the loan was paid off early.

complaint rejected
A fixed rate protects the borrower against rising interest rates. In order to lend at a fixed rate, firms usually borrow on the money market, also at a fixed rate. If a borrower pays off a loan early, and interest rates have fallen since the loan was taken out, the firm will have to pay to break the money-market deal. So it levies an early repayment charge on the customer to recoup its losses.

We looked at the loan agreement that Mrs L had signed. This:

  • explained the circumstances in which the firm could make an early repayment charge;
  • said the charge could be substantial; and
  • told borrowers they might wish to seek independent legal advice before taking out the loan.

The agreement did not say how much the charge would actually be. But it could not do this, because the amount would depend on the interest rate at the time the loan was repaid. We decided the firm had been entitled to charge the fee and we rejected Mrs L's complaint.

firm as executor - duty to advise on inheritance tax had not arisen

When Mr C remarried, five years after his first wife died, he and his second wife both made wills, appointing the firm as executor.

Two years later, Mr C died. Under his will, his second wife was given a life interest in his collection of antique furniture. After her death the furniture would pass to Mr C's three daughters from his first marriage.

Long before Mr C had remarried, his daughters had decided which items of furniture each of them wanted - they had even labelled the individual pieces accordingly. So they were very dismayed to learn, shortly after the death of their stepmother, that they would have to pay inheritance tax on the value of the furniture. This was because their stepmother only had a life interest in it.

They complained to the firm that it had been in breach of its duties and that it should have arranged matters so that inheritance tax could be avoided.

complaint rejected
Mr C's will had been prepared by his solicitor, not by the firm, and we agreed with the firm that it was reasonable to assume the will reflected Mr C's wishes. The avoidance of inheritance tax can be an important consideration but it is not the only factor that people have in mind when making a will. There was no evidence that, after Mr C's death, Mrs C would have wanted to vary the terms of the will for the benefit of his daughters. The firm was not at fault and we rejected the complaint.

mortgage - wrong repayment figure quoted

Mr Q applied to the firm for a £100,000 repayment mortgage. When he filled in the application form he made a mistake and got the address of the new property wrong.

The firm subsequently sent him a mortgage offer but it got the monthly payment wrong - quoting £480, instead of the correct amount - £640. Mr Q later told us that it was at this point that he contacted the firm and gave it the correct address for the new property.

A couple of weeks later, the firm wrote to Mr Q to tell him the monthly payment was £640, and not as stated in the mortgage offer. Mr Q never received the letter. It later transpired that the firm had sent it to the address that Mr Q had given incorrectly on the application form.

The house purchase went ahead but Mr Q contacted the firm to complain when he noticed that it started taking direct debit payments of £640 a month.

A period of considerable confusion ensued. There were long delays before the firm responded to any of Mr Q's letters and telephone calls. And it then contradicted itself. At first it agreed that it was taking the wrong payment. Later it said it was taking the right payment. Mr Q insisted that the firm was committed to accepting the figure of £480. The firm told Mr Q that he was wrong, so he came to us.

complaint rejected
Before Mr Q completed the mortgage application form, the firm had given him an illustration, showing how much the monthly payment was likely to be. So we did not accept his view that the firm had misled him, and that he would not have proceeded if it had quoted the correct figure in the offer. However, we said the firm should compensate Mr Q for the inconvenience it had caused him.

deposit account - disputed payment in

Miss B complained to the firm that it had never credited her deposit account with the payment of £5,000 she had made some months earlier. She sent the firm a photocopy of what appeared to be a stamped receipt for the money.

The firm refused to credit her account as it said it had no record of the payment. Miss B then complained to us.

complaint rejected
We were satisfied that the payment did not appear in the branch records. We asked Miss B to let us see the original receipt, but she refused to do so. And when we asked her where the £5,000 came from, she said she had forgotten. We thought it reasonable to expect her to remember how she received such a large sum. We did not uphold her complaint.

debit card - free travel insurance offer did not apply

Mrs T took up the firm's offer of a special deal, which included a current account (with a debit card) and a separate credit-card account. As part of the package, customers got free travel insurance for trips they paid for with the credit card.

Some months later, Mrs T used the debit card to pay for a foreign holiday. While she was abroad, her handbag was stolen. She assumed the firm's free travel insurance would cover her loss, but when she put in a claim the firm told her she was not covered. This was because she had used the debit - not the credit - card to pay for the holiday.

Mrs T complained to the firm, saying it had told her both cards carried free travel insurance. However, the firm said that the literature it had given her about the offer made the situation clear. It rejected her claim, so she came to us.

complaint rejected
Mrs T was adamant that the firm had misled her. She said that if she had realised the travel insurance did not apply to both cards then she would have paid with the credit card.

However, we noted that - at the time she paid for her holiday - Mrs T had already used the credit card up to its limit. The literature the firm had given Mrs T was perfectly clear. And there was no evidence to suggest that the firm had told her the debit card carried free travel insurance. We did not uphold her complaint.

mortgage - lender's mistake about insurance premiums

In 1996, Mr and Mrs E, who were first-time property buyers, took out a mortgage with the firm. Their monthly payments included premiums for buildings insurance and payment-protection insurance.

The following year, the couple asked the firm if they could change the day of the month on which they made their payments. The firm made the change, but unfortunately it failed to include the insurance premiums.

It was five years after this that Mr and Mrs E complained to the firm. They said they had only just discovered that it had not been deducting payments for the insurance premiums. The firm refused to accept responsibility. It said the couple should have noticed that the amount they paid each month had dropped significantly. And it told them they would have to pay the arrears, together with interest.

complaint upheld
Mr and Mrs E admitted that they had noticed their monthly payments were smaller. However, they said they had assumed that this was because of a reduction in the interest rate, which had taken place around the time they had changed their repayment date.

The firm had sent Mr and Mrs E yearly statements showing their mortgage payments. However, there was nothing on the statements to indicate that the insurance premiums had not been paid. And there was no evidence that the firm had noticed that these payments had stopped.

Mr and Mrs E had continued to have the benefit of the insurance during the period when no premiums had been paid. We therefore decided it was fair to expect them to pay the arrears. However, we told the firm it should write off the interest and pay the couple £750 for the inconvenience its mistake had caused.

Walter Merricks, chief ombudsman

ombudsman news issue 32 [PDF format]

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.