Are ALL early closure penalties actually enforceable and lawful?

uk1

It’s now firmly established in general consumer law that if you cancel something like a holiday, it doesn’t matter what it states in the booking terms, the most that you can be charged as a penalty is a reasonable amount to cover a merchants actual provable costs.  

However, in the finance industry it is still possible to buy a product like a fixed term savings account and before you have actually earned a penny, if you cancelled say in a few weeks because you have found better value, you can be landed with a penalty equal to the number of days it states in the terms even if it has cost the finance company virtually nothing to set up the account. In a holiday booking those terms are unenforceable because they are deemed unfair.  But how do we manage in an industry which ostensibly has even more consumer protections do we have a situation of accepting grossly disproportionate penalties?

Daliah

I suppose you can try to get this change forced onto the savings providers. You should be prepared, however, that they would insist on being given the same rights -  i.e. if the market rates for fixed rate mortgages or loans move up, they should be allowed to cancel the existing deal - at a penalty, obviously - and offer a new one at a higher rate.

uk1

Actually that approach is long gone.

Current consumer law eg consumer protection provides totally unbalanced sets of rights placing all advantages very firmly in favour of the consumer and not the merchant. And the laws and regulations very firmly say that where there is contention, the consumer wins and the merchants lose. 

masonic

The obvious solution is precisely the one that is used by most providers. That is not to allow a cooling off period or the ability to break a fix. The anomaly is the cash ISA, where HMRC mandates that funds must be accessible at all times. This has a detrimental impact on the rates offered already. Preventing ISA managers from apportioning costs to those breaking the fix means that they will be shared by all fixed ISA savers, which I'd argue isn't necessarily any fairer. I'd advocate HMRC removing this rule around access, which doesn't apply to other types of ISA or other types of deposit account.

uk1

Thanks, but you are extracting this issue out of the context of wider consumer law.  

But following your line.  You can have two customers buying the same fixed interest savings scheme and the first deposits a pound, the second £10,000.  The cost of setting up both accounts is identical.  I  question whether it is defensible to penalise one person 10,000 times the amount than the other.  Also, at the moment, all mortgage holders share the cost of defaulters.  That seems much unfairer.  Perhaps it would be fairer to charge the directors!  

I don’t want to sidetrack too far.  My argument is about this issue against the wider consumer context and to me it seems anomalous.  For example taking your point we all accept that the cost of repairing a faulty washing machine is absorbed by other owners in the cost of their washing machine that hasn’t required repair when they bought it.  

If you think about it, you are not actually arguing about others being penalised and being treated unfairly but are instead actually arguing for them to enjoy the benefits of an unfair penalty on somebody else.  If there was a penalty then for it to be consistent with general consumer law it should be the cost of the actual loss and no more, which would be fairer to all and not an unjustifiable penalty.

zagfles

It's nothing whatsoever to do with the cost of setting up the account etc. If you take out a fixed rate/term account you're taking the gamble that interest rates won't rise, or won't rise by as much as expected. If they do, or the expectation changes that they will, you'd likely get higher rate fixed term accounts offered, and you'd have been better off waiting. If they fall, you'd get worse fixed term accounts offered, and your gamble has paid off.

If you could change your mind penalty free for fixed term accounts, their rates would be no better than instant access accounts. They're not going to offer you a no lose gamble!

masonic

uk1 said:

Thanks, but you are extracting this issue out of the context of wider consumer law. 

I do not think these contracts are unlawful. Your best hope is that the FCA and/or OFT took the stance that there should be no barrier to exiting such a contract. Then all savings accounts would become easy access and this problem would go away. Many, myself included, would miss fixed term accounts and the higher rates they offered.

uk1 said:

But following your line.  You can have two customers buying the same fixed interest savings scheme and the first deposits a pound, the second £10,000.  The cost of setting up both accounts is identical.  I  question whether it is defensible to penalise one person 10,000 times the amount than the other.  Also, at the moment, all mortgage holders share the cost of defaulters.  That seems much unfairer.  Perhaps it would be fairer to charge the directors!  

The cost of borrowing a pound to replace a pound reneged by a consumer is not the same as the cost of borrowing £10,000 to replace £10,000 taken away. These charges are not designed to compensate for administrative costs. Admin costs aren't recovered from savers on any sort of savings account.

There is no alternative to mortgage holders sharing the cost of all defaulters. When someone defaults and there is a shortfall in what can be recovered, the money can't come from the defaulter.

uk1 said:
I don’t want to sidetrack too far.  My argument is about this issue against the wider consumer context and to me it seems anomalous.  For example taking your point we all accept that the cost of repairing a faulty washing machine is absorbed by other owners in the cost of their washing machine that hasn’t required repair when they bought it. 

Sorry, what? If a washing machine is faulty, then that is the fault of the manufacturer. When someone erroneously locks away money that they subsequently want to access, then that is their own fault and in my view they should cover the cost of finding another lender to step into their shoes.

uk1 said:

If you think about it, you are not actually arguing about others being penalised and being treated unfairly but are instead actually arguing for them to enjoy the benefits of an unfair penalty on somebody else.  If there was a penalty then for it to be consistent with general consumer law it should be the cost of the actual loss and no more, which would be fairer to all and not an unjustifiable penalty.

I'd presume it is the cost of the actual loss. Do you have data to suggest otherwise? If so, then you could mount a legal challenge, in much the same way as was done for bank charges a couple of decades ago.

uk1

Yes,  I do perfectly understand that.  I made it clear that I was debating this against the background of wider consumer law. You clearly don’t understand this, so fair enough.

They do have another fairer choice and that would be to charge a penalty that related to the difference between their basic no-notice account at the time you entered the fix-term one, and the account you wished to cancel plus a nominal admin charge.  

This approach would also in my view be better for consumers because it would be an encouragement and incentive for finance companies to be much more competitive and do the most it could to retain customers.

Linton

uk1 said:

Thanks, but you are extracting this issue out of the context of wider consumer law.  

But following your line.  You can have two customers buying the same fixed interest savings scheme and the first deposits a pound, the second £10,000.  The cost of setting up both accounts is identical.  I  question whether it is defensible to penalise one person 10,000 times the amount than the other.  Also, at the moment, all mortgage holders share the cost of defaulters.  That seems much unfairer.  Perhaps it would be fairer to charge the directors!  

I don’t want to sidetrack too far.  My argument is about this issue against the wider consumer context and to me it seems anomalous.  For example taking your point we all accept that the cost of repairing a faulty washing machine is absorbed by other owners in the cost of their washing machine that hasn’t required repair when they bought it.  

If you think about it, you are not actually arguing about others being penalised and being treated unfairly but are instead actually arguing for them to enjoy the benefits of an unfair penalty on somebody else.  If there was a penalty then for it to be consistent with general consumer law it should be the cost of the actual loss and no more, which would be fairer to all and not an unjustifiable penalty.

Is the cost of setting up a £10000 account the same as setting up a £1 one?  Setting up an account cannot simply be dealing with a form though the staff time involved needs to be paid for by someone if it is not reouped by paying slightly less interest than would otherwise be the case.  The bank must set up the flow of money to make the interest payments.  There will be a cost of doing that.  For example an opportunity cost as the money could have been used for something else rather than assigned to paying you.

If you want to change he way that fixed term accounts work your best bet is to take it to the courts.  If the law is unclear the judge will clarify it.  Fancy financing a test case?  Or discuss the matter with your MP.  No point in complaining on an internet forum especially as I doubt very many people go to the effort of setting up an account and then change their minds.

Gary1984

You're arguing for the right to break contracts without penalty. I'm glad we don't live in a world where that's possible. Not least because I fixed my mortgage a few months ago and if I can break contracts then why shouldn't the bank be able to as well?

I also don't recognise the idea that consumers are always entitled to refunds minus costs when cancelling. Most hotel bookings, train fares etc will offer at least two prices. One that allows cancellation or changing of dates and one that doesn't. Good luck getting a refund if you've opted for the one with a no cancellation policy!

If you want flexibility then save into an instant access account. It's not like what you want doesn't exist.

uk1

Linton said:

uk1 said:

Thanks, but you are extracting this issue out of the context of wider consumer law.  

But following your line.  You can have two customers buying the same fixed interest savings scheme and the first deposits a pound, the second £10,000.  The cost of setting up both accounts is identical.  I  question whether it is defensible to penalise one person 10,000 times the amount than the other.  Also, at the moment, all mortgage holders share the cost of defaulters.  That seems much unfairer.  Perhaps it would be fairer to charge the directors!  

I don’t want to sidetrack too far.  My argument is about this issue against the wider consumer context and to me it seems anomalous.  For example taking your point we all accept that the cost of repairing a faulty washing machine is absorbed by other owners in the cost of their washing machine that hasn’t required repair when they bought it.  

If you think about it, you are not actually arguing about others being penalised and being treated unfairly but are instead actually arguing for them to enjoy the benefits of an unfair penalty on somebody else.  If there was a penalty then for it to be consistent with general consumer law it should be the cost of the actual loss and no more, which would be fairer to all and not an unjustifiable penalty.

Is the cost of setting up a £10000 account the same as setting up a £1 one?  Setting up an account cannot simply be dealing with a form though the staff time involved needs to be paid for by someone if it is not reouped by paying slightly less interest than would otherwise be the case.  The bank must set up the flow of money to make the interest payments.  There will be a cost of doing that.  For example an opportunity cost as the money could have been used for something else rather than assigned to paying you.

If you want to change he way that fixed term accounts work your best bet is to take it to the courts.  If the law is unclear the judge will clarify it.  Fancy financing a test case?  Or discuss the matter with your MP.  No point in complaining on an internet forum especially as I doubt very many people go to the effort of setting up an account and then change their minds.

It takes exactly the same amount of time and electricity to open up an online Santander account with £1 or £10,000.  It is fully automated. No human is involved.  It is moot for us to discuss what those pennies are because I presume neither of us know. 

Who is complaining?  I’m well aware of the legal options.  I thought others might simply be interested and enjoy the discussion.  I thought that was something we’re allowed to do. Why the nastiness?

I’m sorry you disagree.