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ombudsman news

issue 9

September 2001

account (mal)administration

When a firm just gets things wrong

Many of the customers who call our customer contact division think that their bank or building society has done something wrong when, in fact, it has not. Resolving such misunderstandings at an early stage is an important part of our work.

But we see quite a few cases where the firm did get things wrong - and then did not sort things out quickly enough. There can be a variety of reasons for this. But unless the firm and the customer are prepared to settle at an early stage, we often have to look into things in quite a lot of detail to reach a fair view of the extent of the firm's liability.

Here are some recent examples of administrative problems, where firms got things wrong and we ended up doing an investigation. Some of the problems did not involve much money - but others had fairly major consequences.

case studies - account (mal)administration

policies surrendered and proceeds paid to ex-wife in error

Mr and Mrs J had a number of accounts, and a mortgage, with the firm. They separated - not amicably. They went to court, where it was agreed that Mr J would have sole ownership of the house. He would keep on paying the mortgage and the premiums for the two endowment policies taken out to support it. The firm knew about this agreement.

Mr J kept on paying the policy premiums but (by arrangement with the endowment policy provider) he did so yearly, not monthly. The firm did not know about this arrangement and misunderstood a letter it received from the policy provider, thinking that Mr J was in arrears with his premium payments.

Instead of writing to Mr J about the policies at his address - which it knew - the firm wrote to Mr and Mrs J jointly at her new address. It said that, if the premiums were not brought up to date within 21 days, it would surrender the policies and convert the mortgage to a repayment mortgage. Mrs J ignored the letter and did not tell Mr J about it - so he did not know what was happening.

A month later, the firm wrote once more - again to Mr and Mrs J at her address. The following month, having received no response, the firm converted the mortgage and surrendered the policies. It sent a cheque for the net surrender proceeds of £9,000 payable to Mr and Mrs J - again, to Mrs J's address.

Mr J realised that something had gone wrong when he saw that his mortgage payments had gone up. But he could not get the endowment policy provider to re-instate the policies because by then he had suffered two heart attacks. And it took him some months to get the money back from Mrs J - from whom, by then, he had obtained a divorce.

We decided that if the firm had written to Mr J at his correct address, it was unlikely that any of the later events would have happened. So, one error had led to another. The firm tried to blame Mrs J for not forwarding the letters. We did not accept that, in the circumstances, it was reasonable to expect her to do so. The firm knew that she was not entitled to the money and it could have done more to try to get the money back from her.

Because, in the end, it was too late to set up new policies for Mr J, we took the view that the firm should pay him what they were likely to be worth - less the surrender proceeds, but plus £1,500 for distress and inconvenience. That all came to £26,500.

customer wrongly told that a cheque he paid in had cleared

Mr A had to leave his job because he had been ill for some time. He posted his final pay cheque, for a total of £4,000, to his branch. The cheque was paid in to his account on a Friday and that same day he phoned the branch to check it had been received. He was told that it had.

The following Wednesday, Mr A phoned his branch again to make sure the cheque had cleared. He was told that the branch would not know until the following day. When he phoned back on the Thursday, he was told the cheque had cleared, so he arranged to withdraw £1,500 from a local branch to buy a car.

On the Friday the cheque came back unpaid, marked ‘refer to drawer, please represent'. It came back unpaid for a second time the Friday after that. Mr A eventually got the money three weeks later.

The problem was that his branch was in England - but the cheque had been drawn on a bank in Scotland. These "cross-border" transactions can take a day longer than usual to complete. But the firm's computer system was only geared up for "‘normal" transactions - so the problem wasn't spotted. And when the Scottish connection was finally made clear, the staff involved did not seem to know anything about possible delays with "cross-border" transactions.

We were satisfied that if, at the outset, the firm had understood what might happen and had told Mr A he'd have to wait another day before drawing out the money to buy the car, he would have done so.

Before the complaint came to us, the firm had already refunded the £19 interest it had charged on Mr A's unexpected overdraft. We said it should also refund the charges of £64 - and pay Mr A another £100 for the inconvenience he had suffered.

firm credited a forged cheque to an account - then took the money back without asking

Mr and Mrs K paid a cheque for £5,000 into their account. A week later, after the firm told them the cheque had cleared, they used most of the money to pay off some debts.

Almost two weeks later, the cheque was returned unpaid - and declared to be a forgery. The firm debited Mr and Mrs K's account, causing it to become overdrawn. The couple said the firm was wrong to do that and they refused to repay the overdraft. The firm put the debt in the hands of recovery agents and registered it with the credit reference agencies. The time taken for the cheque to be sent back was much longer than normal. We said the firm had not acted reasonably by just accepting it back almost three weeks after it had been paid in. It should not have simply debited the cheque back without making any further enquiry. So we told the firm to re-calculate Mr and Mrs K's account as though the cheque had never been returned, and to remove the adverse credit entry.

joint cheque wrongly credited to wife's sole account

Mr D and his wife applied for a re-mortgage from the firm with whom he already had a loan. This was agreed on condition that the existing loan was re-paid. The couple arranged to do this using some of the money they would obtain from the re-mortgage.

When the re-mortgage was completed, Mr and Mrs D's solicitors sent them a cheque for the surplus amount - to be used to repay the loan. Mrs D paid the cheque into her sole account. A few days later, she and her husband separated.

Mr D said that it was not until after the separation that he knew the solicitors had issued the cheque - and by then it was too late to get the money back from his wife.

The firm knew what the money was to be used for, yet it allowed it to be paid in to the "wrong" account. It argued that Mr D had received benefit from the money. We disagreed. We told the firm, first of all, to give him half of the value of the cheque. And because of its generally unhelpful attitude - and some manifestly incorrect advice, which delayed things unnecessarily - we added £400 for inconvenience, making compensation of almost £1,000 in total.

delay caused loss

Mr G repaid his mortgage with the firm. He then applied for another mortgage, through a mortgage broker, and received an offer from a different lender. One of the conditions of the new offer was a satisfactory reference from the firm, as his old lender. But the broker told Mr G that copies of statements should do instead - they would be quicker, cheaper, and easier to get hold of. This was important because the sellers wanted a quick exchange of contracts.

Mr G did not have all the statements so he asked the firm to let him have the necessary copies. The firm said this would take no more than five days, and would cost him £15. Three weeks later, and after chasing the firm on several occasions, Mr G was still waiting for his copy statements. A few days after that, the sellers pulled out of the deal, saying they had lost confidence in Mr G's ability to follow it through.

Two weeks later, Mr G got his statements. By then the property had been re-marketed at a higher price - up by £15,000. Mr G went back to the sellers and managed to negotiate a lower purchase price, although it was still £5,000 more than he had originally agreed to pay. He claimed this amount from the firm, together with costs of over £1,000.

We decided that Mr G would have had a very substantial chance of buying the property at the original price if the firm had let him have the copy statements within five days, as it had said it would do. So we were satisfied that he had lost out on at least £5,000. After questioning some of the costs, we eventually told the firm to pay Mr G £5,750.

how not to handle a re-mortgage application

Mr and Mrs B already had a mortgage with the firm. They applied to it for another one because they wanted to move house. They also decided to transfer their current account to the firm. Fairly quickly they got their mortgage offer - and new cheque books and cards. Two weeks later, the firm told them it had lost all Mr B's details because of a computer problem, so it would have to start all over again with the mortgage application.

At that point, Mrs B was out of the country on business. That delayed things quite a bit as her signature was needed on the new forms. The forms were eventually completed the following month. When he sent them back, Mr B asked the firm if it would waive the mortgage arrangement fee - in view of the problems they had encountered so far.

A month or so later, Mr B phoned the firm to ask how things were going. The firm said it had done nothing with the forms because it was waiting for him to pay the arrangement fee. By then, there were three weeks to go before contracts were due to be exchanged.

Mr and Mrs B decided they had lost faith in the firm's ability to administer their new mortgage. They went to another lender and got a mortgage completed in time. However, they had to pay an early repayment fee of over £2,000 on their old mortgage. They also discovered that the firm had wrongly bounced monthly premiums on their endowment policies but had not told them what it had done (Mr and Mrs B had transferred the direct debits when they first opened their new current account). The couple had always intended to surrender the policies when the old mortgage was repaid. But the effect of the bounced premiums was a reduction of almost £2,500 in the policies' surrender values.

Mr and Mrs B wanted the firm to make good their losses and to pay them significant compensation for all the unnecessary effort it had put them through and the time that had been wasted. The firm came up with an offer fairly quickly but the couple rejected it. Following our involvement, the firm increased its offer to £5,250, which was accepted.

cheques returned unpaid even though overdraft facilities agreed

Mr C ran a transport business. He was having cashflow problems and the firm where he held a business account was bouncing his cheques, so he went to see the firm, accompanied by his accountant. A few days after the meeting (while Mr C was away from home) the firm wrote to him confirming an overdraft facility of £110,000 for the following month. But shortly after that it bounced a number of Mr C's cheques.

Mr C said that at the meeting he had shown the firm a cashflow forecast which revealed a borrowing need of £134,000. He agreed that the firm had said no to that. But he said it had agreed to let the overdraft go up to £130,000 - not to the £110,000 quoted in the letter. Because of that, he had felt able to write the cheques that were later bounced.

Many of the cheques were bounced while Mr C was still away, including the most important one - his monthly payment to his diesel supplier. Because that payment was bounced, the supplier stopped Mr C's fuel card, seriously affecting his ability to continue trading.

The firm denied that it had agreed an overdraft figure of £130,000 but Mr C's accountant confirmed Mr C's recollections of what the firm had said. There were few written records available from the meeting. But the member of the firm who was at the meeting was senior enough to have agreed a facility of £130,000. And everyone knew how important the forthcoming payment to the diesel supplier was. So, on balance, we decided the firm had agreed to a temporary maximum overdraft of £130,000 - not £110,000.

Because the diesel payment was bounced, the supplier refused to let Mr C have any more fuel unless he paid for it in advance. That put a lot more strain on his cashflow - and inconvenienced him and his drivers. Sometimes they had to buy fuel from other suppliers for cash - which made it difficult for Mr C to claim back the VAT. Added to that, because of the lower overdraft facility, the firm's charges and interest had been higher than they should have been. We therefore told the firm to pay Mr C £8,000.

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.