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ombudsman news

issue 51

January/February 2006

ombudsman focus - Jane Hingston on safer credit and debit card spending – and facing up to debt problems

ombudsman focus looks at disputed transactions involving credit/debit card spending, and asks what should happen when customers are experiencing financial hardship.

At this time of year many customers may still be feeling the pinch of the Christmas holiday season. It’s not unusual for good intentions – "...we’ll keep things simple this year..." – to be forgotten as people get caught up in a seasonal spending frenzy. And many customers rely heavily on overdrafts and credit cards during the Christmas period and for New Year sales bargains.

Sometimes, in all the frantic activity, certain things can go unnoticed. Banking firms and credit card companies operate systems designed to detect unusual account activity. They may contact customers, or impose additional checks at the point of sale, to make sure transactions are authorised. Customers making genuine purchases with their credit or debit cards may sometimes find this unwelcome or embarrassing. But checks of this type are in everyone’s interests to help prevent fraud.

However, these checks don’t always happen and the systems cannot ensure credit and debit card transactions are always genuine. Fraudsters are known to be more than usually busy at Christmas and sale times. So it’s especially important that customers monitor statements covering their seasonal spending. This will allow them to quickly identify and query any transaction they do not recognise.

A significant number of the banking-related complaints referred to us concern disputed plastic card transactions. The customer denies having made a transaction, while the banking or credit card firm insists it is the customer’s responsibility. We decide such cases on the balance of probabilities. Which is more likely, taking into account all the details of the case, that the customer carried out the transaction but then forgot about it - or that their card was used without their authority-

If we decide that credit card transactions were made without the customer’s authority, then (under the relevant sections of the Consumer Credit Act 1974) the customer’s liability is normally limited to £50.

But what if the problem is not unauthorised activity, but that the customer’s level of debt has become unmanageable- Perhaps heavier-than-usual expenditure over the holiday period has then been made worse by something unexpected like an illness or sudden job loss.

We asked our lead ombudsman for banking complaints, Jane Hingston, about this area of financial difficulty.

how is the consumer supposed to access money for living expenses if, for instance, they’ve reached the limit of their overdraft and can’t afford to repay it-

This is always a difficult situation. A bank is not obliged to keep increasing the limit. Anyway, that could do the customer more harm than good in the long term. But the firm must deal "sympathetically and positively" with cases of genuine financial hardship. This is set out in section 14.10 of the Banking Code, which deals specifically with financial difficulty.

What counts as "sympathetic and positive" will depend, to a great extent, on the customer’s particular circumstances – there is no ‘one size fits all’ solution here.

what other action would you expect the firm to take-

A lot of it is just good sense, really. The firm should take practical steps to avoid the situation getting worse – such as offering to cancel direct debits and standing orders which cannot be met, so that charges do not mount up on the account.

There may be some scope to look at the interest rate charged on the account – particularly if it is currently being applied at the firm’s "unauthorised borrowing" rate. A firm should give careful consideration before offering to consolidate existing borrowing. That is because – if approached in the wrong way – this can quickly make a customer’s situation worse, rather than better.

Also, when an account is being operated on the margins, one small mistake by the firm can tip things over the edge for the customer and create further financial problems for them. So the firm needs to be more than usually careful not to make mistakes!

The firm should also make sure the customer is aware of the availability of free and reputable debt advice. Such advice can make a real difference where the customer is feeling overwhelmed – owing debts to many different lenders.

is the firm able to offset any of the customer’s income against the debt-

A bank cannot just grab any money that comes into the account, in order to repay the debt. This is particularly important where the customer’s salary or benefit payments are mandated to the account.

The Banking Code says the customer should be left with "sufficient money for reasonable day-to-day expenses". This makes it important for the bank and customer to work together to agree on a repayment arrangement. The arrangement needs to take into account the customer’s individual needs and reasonable expectations, so that everything coming into the account over and above the amount to be used for repayment is left free for the customer’s use.

If more than one lender is involved, the firm that holds the primary bank account must be prepared to be reasonably flexible. This will help the customer to reach acceptable repayment arrangements for all the debts. The firm would need to take into account all the priority payments the customer has to make – and discuss this with the customer. Household bills and other debts are an obvious priority, as are essential goods and services such as child support payments.

The Common Financial Statement – the standard form developed by the British Banker’s Association and the Money Advice Trust to chart income and expenditure – can help simplify things for the customer, and we would expect a firm to use this form (or something very like it).

can the ombudsman service help with debt problems in general, then-

No – because the service we offer is dispute resolution, rather than debt or money management. We are not in a position to offer debt advice, or to act as an intermediary between the customer and the firm in arriving at repayment arrangements.

However, we can look at cases where a dispute has arisen about whether the customer received sympathetic and positive treatment in respect of financial hardship. We see quite a lot of these types of cases and find most firms will work with us to reach a quick and informal resolution of the complaint, where we are satisfied there is genuine financial hardship.

Walter Merricks, chief ombudsman

ombudsman news issue 51 [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.