Alliance Trust Savings massive fee hike

Thanks naedanger I will post tomorrow, tired out tonight!

koru wrote: »

... the FSA ruled against me regarding Unfair Contracts Terms.

What was their reasoning? It seems a very surprising decision and not in line with clear OFT guidance.

The FSA guidance is not quite so clear, but it still seems to me to be against FSA guidance, reading the guidance in its entirety. Also OFT and FSA are meant to be consistent.

Ok here goes. A bit of background first - I had 6 accounts with them, an ISA and an Investment Dealing account in my own name, and 4 designated Investment Dealing Accounts for my children, those had only about £500 worth if investments in them. I didn't actually choose to invest with ATS, my original provider decided to discontinue offering dealing accounts and transferred everybody over to ATS in 2008. I am pretty sure that I never signed a contract with ATS or received any Ts & Cs from them, I am very good about keeping paperwork and I can find nothing at all. Don't know how I stand legally with that in terms of having an agreement with them, maybe the fact that I allowed the arrangement to continue means I implicitly made an agreement with them, I don't know. Thought though that you always had to sign an agreement. Anyway, in August 2011 they introduced an annual charge of £30 just for the ISA, which I paid, and then a year later they increased this charge by 60% to £48 and introduced the same annual charge for each separate investment dealing account, meaning I would have had to pay nearly £300 per year, an increase of almost 1000%. The annual fees on my children's accounts would have amounted to 10% of the total value of their investments! I rang up to request a fee free exit, they refused, so I sent them an official complaint in July, following which I filed a complaint with the ombudsman that same month. The adjudicator found in my favour but ATS refused to accept their decision, saying that they had recently had an adjudication on a case similar to mine that was not upheld, and requesting that my case proceed to a formal ombudsman review. The Ombudsman has just written to me with a provisional decision, saying that he was considering departing from the conclusions reached by the adjudicator, but this might change depending on any further information that I or ATS send them. Here is his response, apologies for the length of it:-

Complaint

xxx complains about Alliance Trust Savings Limited introducing an annual administration charge on its investment accounts and increasing the annual administration charge it applied to ISA accounts. xxx says that the introduction of these charges meant the accounts she held were no longer appropriate for her, and that it was unfair in these circumstances for her to have to pay exit charges to move her investments elsewhere.

Background

An adjudicator considered the complaint, and recommended that it should be upheld. Alliance Trust did not agree and said, in summary:
It had acted in a reasonable manner, in fairness to all its customers. Although the charges taken from xxx’s investments may seem proportionately high, they were in line with its existing charging structure.

My provisional findings

I have considered all the available evidence and arguments to decide what is fair and reasonable in the circumstances of this complaint. When reaching my decision, I need to take account all the relevant regulations, guidance and standards. In this case xxx has referred to the Financial Services Authority (FSA) guidance on improving standards in consumer contracts, which relates to the Unfair Terms in Consumer Contracts Regulations (UTCCR) 1999.

However, whilst I am required to take account of the relevant regulations, it is not within in my remit to enforce them – so I cannot decide if a particular contract term is fair under the 1999 regulations. But I can have regard to the regulations and decide what is fair and reasonable in the circumstances, taking into account what they allow.

xxx opened her accounts with Alliance Trust in March 2008. She held both ISAs and Investment Dealing Accounts. The same Terms and Conditions applied to both. The part of those Terms and Conditions which I consider relevant to this case is that named “Variation of Charges” (“Changes to Charges” in later versions). The Terms and Conditions in force when xxx opened her account were those dated November 2007. They said:

“1.10 Variation of charges

We shall only change (and this may be an increase or a decrease) the charges that apply to the services for a valid reason. We consider that a valid reason will include:

-any increase or decrease in the cost of providing the services;
-or any increase or decrease in volume of customers using the services; or
-any change in the level or method of delivery of the service.

Any change in charges will be effective and deemed accepted by you unless we receive an objection in writing from you before the new charges come into force. If you do object, you will be able to terminate your contract with us and transfer the content of your
Plans at the charges that were current prior to the notice of changes.”

New Terms and Conditions were introduced in September 2008, April 2011 and April 2012. They each said:

“51. Changes to Charges

…we will only change our Charges for one or more of the following reasons:

-an increase or decrease in the cost of providing the Services
-an increase of decrease in volume of clients using the Services
-a change in the level or method of delivery of the Service, or
-any other reasonable or economic business reason.

49.
…….if a change is made to our Charges and you object to it, you will be entitled to close your Account and withdraw your Investments. If you do this, the closure of your Account and
the withdrawal of your Investments will be effected at the Charges that were current prior to the changes coming into effect.”

Having carefully considered these terms in conjunction with the relevant regulations and the FSA guidance (which is not in itself regulation – it only details the FSA’s view on how the
regulations might be applied) I consider that Alliance Trust has acted in a fair and reasonable way.

The FSA guidance, and the UTCCR Schedule 2 indicative list of terms which may be regarded as unfair, say the terms of a contract relating to a unilateral variation might be considered unfair if it does not include additional terms as to the freedom to dissolve the
contract where the valid reasons are not stated expressly. UTCCR Schedule 2, para 1(j) and para 2(b) say:

“1. Terms which have the object or effect of … (j) enabling the seller or supplier to alter the terms of the contract unilaterally without a valid reason which is specified in the contract;

2(b) Paragraph 1(j) is without hindrance to terms under which a supplier of financial services reserves the right to alter the rate of interest payable by the consumer or due to the latter, or the amount of other charges for financial services without notice
where there is a valid reason, provided that the supplier is required to inform the other contracting party or parties thereof at the earliest opportunity and that the latter are free to dissolve the contract immediately.

Paragraph 1 (j) is also without hindrance to terms under which a seller or supplier reserves the right to alter unilaterally the conditions of a contract of indeterminate duration, provided that he is required to inform the consumer with reasonable notice
and that the consumer is free to dissolve the contract.”

Schedule 2 therefore says that a term is more likely to be unfair if terms can be varied unilaterally without any reason at all, where the reason is not a valid reason, or where the valid reason is not expressly stated in the contract. It also says that a term is more likely to be unfair if the rate of charges can be varied without notice, or do not allow the consumer to dissolve the contract immediately if charges are varied.

And it says a term is less likely to be unfair if the terms can be varied unilaterally for a valid reason expressly stated in the contract, if the contract requires a customer to be given reasonable notice in advance of the variation, and if the consumer is free to dissolve the contract.

In this case I think the term was reasonable. I say this because it stated valid reasons, required notice to be given and allowed xxx to leave if she did not wish to accept the new charges. It therefore seems consistent with what was required by the regulations. And, on broader terms, I think it reasonably put xxx on notice that charges might be introduced or increased and that in the event of this happening the cost of moving her investments elsewhere would need to be paid. She should not therefore have formed the expectation that charges would remain the same, or that Alliance Trust would cover the cost if she wanted to leave.

xxx says that the regulations mean that she should not have been asked to pay the cost associated with moving her investments elsewhere if she wanted to avoid the new or increased charges. But I think this would only be the case if the terms xxx had accepted
did not provide for an increase in charges for valid reasons and make her aware that she would need to pay the cost associated with moving her investments elsewhere if she did not accept the increase.

Also in this case the charge was not a penalty for leaving an investment early (which the terms did say would be waived) but a charge to cover the administrative work involved in materialising xxx’s holdings ie transferring them out of the nominee account into xxx’s own name or another nominee. In the circumstances, and given that xxx was made aware of (and accepted) this charge, I think it was reasonable to apply it.

The Ombudsman specifically mentions the UTCCR Schedule 2 with regard to valid reasons, giving notice, and the consumer being free to dissolve the contract. He suggests that ATS fulfilled all these regulatory requirements and acted in a fair and reasonable way. He quotes the UTCCR in support of ATS and completely ignores the FSA Guidance Paragraph 3.16, 'For example, we would not regard consumers as being free to dissolve the contract if the terms did not provide that any exit charges would be waived to remove financial barriers to exiting the contract.'

I would be very grateful to read any thoughts that anybody has on this before I get back onto the FOS. I think I am right in saying that the complaints that Malfesto and Snowman brought were resolved at the adjudication stage because the companies backed down - I wonder what the outcome would have been if they had not backed down and it had gone to a formal ombudsman decision. Thanks in advance for your help!

naedanger wrote: »

I will draft a reply, but it may not be for a day or two.

Thanks, so much appreciated! I guessed it might not be, with all that information to assimilate......

Out of interest, are you in the legal profession or are you just a very savvy layperson?

This is rather long. Also I will probably not have time to look at any comments before Sunday.

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I refer to your provisional decision and strongly disagree that it is consistent with FSA guidance.

I believe the UTCCR 1999 and both the FSA's and the OFT's guidance all very strongly support my view that, for the price increase to be fair, I should be “free to dissolve the contract”.

I believe the crucial point is that the FSA would not regard consumers as being free to dissolve the contract unless exit charges are waived (FSA's “Finalised Guidance – Unfair Contract Terms: Improving Standards in Consumer Contract” dated January 2012 states this in section 3.16). Therefore you are concluding that I do not need to be free to dissolve the contract for the price increase to be fair.

Your analysis

Your analysis includes

“... a term is less likely to be unfair if the terms can be varied unilaterally for a valid reason expressly stated in the contract, if the contract requires a customer to be given reasonable notice in advance of the variation, and if the consumer is free to dissolve the contract.”

To me this statement clearly requires not only that the unilateral variation be for a valid reason but also that both reasonable notice be given and the customer be free to dissolve the contract.

You say “In this case I think the term was reasonable. I say this because it stated valid reasons, required notice to be given and allowed xxx to leave if she did not wish to accept the new charges. It therefore seems consistent with what was required by the regulations”. I agree the reason for the price increase may be valid and I agree I was given notice. But I strongly disagree with the statement that I was allowed to leave if I did not wish to accept the new charges. There is clearly no concession in being allowed to leave and pay the normal exit charges. And both the OFT and FSA take the meaning of “free to the dissolve the contract” as meaning the exit charges should be waived (FSA guidance section 3.16). I was NOT “free to dissolve the contract”.

OFT Guidance

The OFT's guidance on “Unfair Contract Terms Guidance: Guidance for the Unfair Terms in Consumer Contracts Regulations 1999” dated September 2008 is a very clear document, and if you have not read it then I would implore you to do so (or at least read section 12 which is very short). Section 10 covers suppliers' variations of terms generally. However the more relevant section is Section 12, which covers price variation clauses.

The OFT explain in section 12 that for a contract to be balanced both parties should be sure of getting what they were promised in the contract. It notes the difficulties consumers have of verifying that increases imposed on them actually match net cost increases. The key section is section 12.4 which lists the ways price variations can be introduced fairly, which I have quoted below.

A degree of flexibility in pricing may be achieved fairly in the following ways.
• Where the level and timing of any price increases are specified (within narrow limits if not precisely) they effectively form part of the agreed price. As such they are acceptable, provided the details are clearly and adequately drawn to the consumer's attention.
• Terms which permit increases linked to a relevant published price index such as the RPI are likely to be acceptable, as paragraph 2 of Schedule 2 to the Regulations indicates, subject to the same proviso.
• Any kind of variation clause may in principle be fair if consumers are free to escape its effects by ending the contract. To be genuinely free to cancel, they must not be left worse off for having entered the contract, whether by experiencing financial loss (for example, forfeiture of a prepayment) or serious inconvenience, or any other adverse consequences.

They highlight in a footnote that this list of fair reasons for varying the price of a contract is much more limited than the list of reasons for varying the other terms of a contract:

Note the absence of a 'valid reasons' route to fairness. The OFT does not consider that use of 'valid reasons' normally justifies price increases, essentially on grounds stated in paragraph 12.3 that is, lack of verifiability

Therefore since neither of the first two bullet points apply to my case, the only other way the OFT believe the price variation would be fair is if I was “free to escape its effects by ending the contract” and given the rest of the footnote it is clear this means not having to pay exit charges which would clearly leave me worse off.

FSA Guidance

FSA Guidance repeated states that a term is less likely to be unfair “if the consumer is free to dissolve the contract” and, as stated above, this means according to the FSA's guidance (section 3.16) having exit charges waived. Indeed the usefulness of being given advance notice of the variation is severely limited if the variation cannot be avoided without considerable cost.

For example consider section 3.5. It cannot be right to read this as meaning only one of the three numbered points needs to be true for the variation to be less likely to be unfair. Otherwise all that would be required for a variation to be considered less likely to be unfair would be for the variation to be for “a valid reason specified in the contract”. This would mean UTCCR schedule 2 paragraph numbered one would only need point 1(k). Therefore all three points must apply. And in the third numbered point the FSA concludes a unilateral variation to a contract of indeterminate nature is less likely to be unfair if “the consumer is free to dissolve the contract”. Yet this contract is of indeterminate nature and I am NOT free to dissolve the contract.


General Fairness
I believe if Alliance Trust do not waive their exit charges I will have been treated unfairly for the following reasons.

1) I cannot verify that their price increase is justified by the increase in their underlying costs. Indeed I find it hard to believe their costs have increased at as high a rate as their charges.

2) It is unfair for Alliance Trust to only offer two unacceptable options i.e. to either (1) accept charges I would never have originally agreed to, or (2) pay to avoid these changes. Neither option is reasonable. To be reasonable they also need to offer either (a) the option to continue the contract on the current charges or (b) the opportunity to exit without charge.

3) If, as Alliance Trust believe, they can change their charges without giving customers the option to exit freely, provided the change is for a valid reason specified in the contract, then any existing charging structure can become meaningless as it can be changed and customers cannot move away without incurring unexpected costs. This will be seriously anti-competitive as well as unfair.


Summary
I do not dispute that Alliance Trust should be permitted to vary the price of the contract if their costs have increased.

But I believe the UTCCR 1999 and both the FSA's and the OFT's guidance all very strongly support my view that, for the price increase to be fair, I should be “free to dissolve the contract”.