Are cancellation charges legal?

Miss_Moppet

I’m sorry if this issue has been raised already but my search of this board hasn’t provided any results specifically on this topic.

I’ve recently been looking at the more competitive tariffs on various comparison websites, and it seems that there’s a growing trend among energy supply companies to impose cancellation fees on their tariffs.

I can’t see the justification for such charges, even for capped tariffs. After all, even on capped tariffs the customer is already paying over the odds to begin with. Why should there be any other payment? It seems to me that these so called cancellation fees are really penalties. I read somewhere that penalty clauses are illegal, isn’t that why the banks are having to repay so much of their charges back to their customers?

If this trend toward penalties on tariffs isn’t stopped, I wonder if we'll soon find that every tariff on offer has a hefty penalty clause.

I’ve even come across fixed term tariffs with penalty clauses that automatically renew at the end of the period (including with another penalty clause). This means that customers have to be very careful indeed if they wish to leave that tariff, or they get penalised either for leaving too early or too late. Following the small print becomes very necessary indeed. This can’t be right for consumers can it? Without doubt, we should be protected from this sort of sharp practice.

SwanJon

Yes they are legal (cf mortgages). Don't like the automatic roll-overs though.

it's all part of trying to reduce costs.

Miss_Moppet

I’m not sure if you’re right. I remember everyone thought the banking (penalty) charges were legitimate until just one person (Stephen Hone) complained.

From what I’ve read, he argued that under the Unfair Terms in Consumer Contracts Regulations (1999) all penalty charges have to truly reflect the cost of administering them. I take that to mean if a penalty charge (cancellation fee) is higher than its admin cost, it’s unfair, and invalid.

In the case of the banks, this has gone to the House of Lords, but the banks have already lost in the High Court and the Court of Appeal. If the House of Lords takes the same view as the lower courts, then that paves the way for the Office of Fair Trading to consider if the banks can justify their various (penalty) charges. Unless the banks can show their charges merely covered their admin costs, and weren’t a money making exercise the Office of Fair Trading will almost definitely class them as unfair.

You mention mortgages as though that’s a cut and dry example of penalty charges being legal. What did you have in mind exactly?
It seems to me that customers are being deliberately funnelled into tariffs that contain these cancellation fees, and you’ve already indicated your objection to “automatic rollovers”. I can’t see any justification for such rollover penalty charges either, and that’s why I certainly wonder how those can possibly be legal.

I can see why the energy companies have latched onto this idea. If the idea is to claw back commissions and cashbacks from early leavers, does that come under the category of “admin costs”. If not, then doesn’t that make such clauses unfair?

You only have to look at other threads on this board to see the genuine sense of unfairness that this growing trend is generating, for example http://forums.moneysavingexpert.com/showthread.html?t=1898315

At the least, we need a code of practice setting up to make the energy companies play fair on this (and to set a maximum charge), otherwise we’ll suffer a sort of penalty charge creep until we find ourselves hog tied whichever direction we jump, especially on rollover contracts, which is what all the competitive tariffs are fast becoming.

moonrakerz

Miss_Moppet wrote: »

From what I’ve read, he argued that under the Unfair Terms in Consumer Contracts Regulations (1999) all penalty charges have to truly reflect the cost of administering them. I take that to mean if a penalty charge (cancellation fee) is higher than its admin cost, it’s unfair, and invalid.

I would think that a finance house/energy could put up a much better justification of the costs they incur in redeeming a mortgage or transferring your energy supply to someone else than the banks could in that case.

If you don't like it - YOU take them to Court - you might make a name for yourself !

sporedude

Yes Erin Bronkovich, Do it for the people!

1carminestocky

SwanJon wrote: »

Yes they are legal (cf mortgages). Don't like the automatic roll-overs though.

it's all part of trying to reduce costs.

So why offer cash back inducements? Sometimes of up to £100?

Cardew

1carminestocky wrote: »

So why offer cash back inducements? Sometimes of up to £100?

I agree with you on that point.

However it would mean every company agreeing not to pay inducements. If just one company continued to pay cashback. they would get masses of extra customers. It is amazing how many people are seduced by cashback - 'free' champagne - green shield stamps or the 21 century equivalent(Nectar?)

Miss_Moppet

Cardew wrote: »

However it would mean every company agreeing not to pay inducements. If just one company continued to pay cashback. they would get masses of extra customers. It is amazing how many people are seduced by cashback - 'free' champagne - green shield stamps or the 21 century equivalent(Nectar?)

The problem the energy companies concerned have got themselves into is that they pay out commission to the comparison websites simply for the introduction of each new customer, regardless of how long that customer stays.

Anyone could see that such instant commissions would inevitably lead to the emergence of *switching tarts” (not my phrase) once the comparison websites started to offer cashbacks. It’s only common sense to say that an introductory commission shouldn’t be paid until the customer has stayed for a period of perhaps a year, and that would have avoided the need for penalties altogether.

This is certainly a mess that needs tidying up. We’re now getting rollover penalties on automatically renewed fixed term contracts. If a customer has already been with the same energy company for a fixed term why should that customer be penalised for leaving sometime in the next term? Where is the loss? The energy supply company has paid no further commission. Surely, this is blatantly unfair and if it’s unfair, then surely it’s unenforceable. Or am I missing something?

In addition, if you’re just switching to another tariff with the same company (i.e. BG's websaver 3 to websaver 4), how can that possibly justify a penalty?

SwanJon

Miss_Moppet wrote: »

I’m not sure if you’re right.

Does make me wonder why you asked the question then.

There is a fundamental difference between a single charge for terminating a contract early, and repeated charges when exceeding and overdraft.
I've seen banks charge more per transaction than mny suppliers charge for the single time they do it.

My comparison with mortgages was with the fixed/tracker ones - you fix your rate (or track at x% above standard etc) for y years. If you change your mortgage before this time, a charge is applied. Sorry if that wasn;t clear.

How would you feel if they offered to recalculate your bill at standard rates if you left early? Would you consider that fair?

Miss_Moppet

Hi SwanJon, the quotes in blue italics below are taken from your post number 9 above.

“Does make me wonder why you asked the question then.”

I asked the question because I wanted to know the answer. I thought that was how this forum worked.

“There is a fundamental difference between a single charge for terminating a contract early, and repeated charges when exceeding and overdraft.”

Oh really? Obviously, if a bank has a customer who (for example) ignores the first letter, another letter is required, and maybe several more. Each of those letters is then necessary and involves some clerical time and expense.

As I understand it, the problem with the banks was that they were charging around £30 to send a standard letter that possibly only cost the bank £5 to produce. I don’t have a problem with the banks charging a ‘fair’ rate for each letter, but simply charging fees well beyond the admin costs as a money making exercise is what has landed the banks in hot water.

I can’t see the “fundamental difference” you mention as between a single charge or multiple charges, in either case surely it’s a question of whether the charge is genuinely an admin cost or a puffed up financial sting. Can you please explain where the fundamental difference is that you have in mind?

“My comparison with mortgages was with the fixed/tracker ones - you fix your rate (or track at x% above standard etc) for y years. If you change your mortgage before this time, a charge is applied. Sorry if that wasn;t clear.”

How high would that mortgage charge have to be (as a percentage of the loan) before you said it was unfair? 10%, 20% perhaps, how much? How would you arrive at your figure?

Let’s remember that my original post questioned the legality of cancellation charges by energy companies. How much would these penalty cancellation charges have to be before you agreed that they were unfair? £100? £300? Or do you think the energy companies should be able to charge what they like?

How would you feel if they offered to recalculate your bill at standard rates if you left early? Would you consider that fair?

I assume you’re referring to an energy bill. If I'd paid my bill at the correct contract tariff rate, then what right would an energy company have to charge me again at another rate?

I’m afraid your replies so far don’t appear to be making much sense.

Cardew

Miss_Moppet wrote: »

The problem the energy companies concerned have got themselves into is that they pay out commission to the comparison websites simply for the introduction of each new customer, regardless of how long that customer stays.

Anyone could see that such instant commissions would inevitably lead to the emergence of *switching tarts” (not my phrase) once the comparison websites started to offer cashbacks. It’s only common sense to say that an introductory commission shouldn’t be paid until the customer has stayed for a period of perhaps a year, and that would have avoided the need for penalties altogether.

This is certainly a mess that needs tidying up. We’re now getting rollover penalties on automatically renewed fixed term contracts. If a customer has already been with the same energy company for a fixed term why should that customer be penalised for leaving sometime in the next term? Where is the loss? The energy supply company has paid no further commission. Surely, this is blatantly unfair and if it’s unfair, then surely it’s unenforceable. Or am I missing something?

In addition, if you’re just switching to another tariff with the same company (i.e. BG's websaver 3 to websaver 4), how can that possibly justify a penalty?

We are in violent agreement on all the points you make!

I have posted my views on the Websaver3 - Websaver 4 situation on another thread.

The comparison websites are now multi-billion pound companies who encourage switching purely to maximise their commission. That commission and the huge clerical effort for the Utility companies is paid for by us in higher prices.

At least the exit penalties go some way to preventing this practice - in particular deters the 'tarts'.