Are ALL early closure penalties actually enforceable and lawful?

masonic

uk1 said:

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.

This is a Savings & Investments board. I think your question would be better asked in a legal forum. I don't think there are many around these parts who could debate the law with you. Certainly none who could give you legal advice as to making a claim.

I find it a little insulting that you've concluded that you aren't getting the answer you desire because of a deficiency on my part. Perhaps you might consider the possibility that you haven't explained yourself very well.

uk1 said:

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. 

That doesn't make sense, because money committed for a fixed term can be lent differently than "no-notice" money. The charge should be proportionate to what it would cost the bank to find a new lender to step into the shoes of the exiting lender. Pragmatically, the bank has to provide a figure to the consumer up front, so the fee necessarily has to be based on some sort of average. Otherwise all they could say is there'll be a penalty, and it will depend on the exact circumstances at the time you decide you want your money back early. I think we can agree that would be deeply unsatisfactory.

Anyway, this is not moralsavingexpert, so I'll not engage in any further discussion around fairness.

EthicsGradient

uk1 said:

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.

I don't think you understand what finance companies do with money once you've deposited it with them. They lend it out to other people or organisations, with terms, such as "you don't have to pay back the principal for another 25 years". If the saver feels they want their money back " in a few weeks because you have found better value", then it does indeed cost 10,000 times as much to get hold of £10,000 to pay them as it would for £1.

Who is complaining? Well, you are: "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?"

uk1

My apologies to all.

phillw

uk1 said:

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. 

It's not just the cost to setup the accounts, after you deposited it they found someone to lend the money to & now they need to find someone to cover it and in the short term borrow it themselves. Which will cost them more for £10,000 than £1

If you could open a fixed term account that doesn't allow withdrawals then I suspect it wouldn't allow deposits either and so you wouldn't open it with £1 but if you did then they probably made a loss on the account whether you withdraw it after 2 weeks or left it to run to term. There are reasons why accounts have minimum deposits.

uk1

phillw said:

uk1 said:

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. 

It's not just the cost to setup the accounts, after you deposited it they found someone to lend the money to & now they need to find someone to cover it and in the short term borrow it themselves. Which will cost them more for £10,000 than £1

If you could open a fixed term account that doesn't allow withdrawals then I suspect it wouldn't allow deposits either and so you wouldn't open it with £1 but if you did and then closed it then they probably made a loss on the account whether you withdraw it after 2 weeks or left it to run to term

Thanks,

Your point I perfectly understand - the forward commitment and planning and presumptions  of subscriptions or purchases are not unique to the finance industry.  Many other industries have  by varying degrees  similar challenges.  Arguably the main reason for so much turbulence over the last decade or two in this industry is not overly disconnected to it’s lack of prudent forward planning and much of it has been caused by imprudent forward optimism.  A person cancelling their savings account today will be replaced by another tomorrow and the ship navigates slightly  accordingly. 

If however this favoured treatment on the issue of penalties in this industry were treated in the same way as elsewhere, perhaps the turbulence we see might be reduced a little and the industry might be forced to be a touch more competitive and better to it’s customers. 

Anyway, I didn’t want to be rude and ignore your thoughts, and I’m happy for the thread to be deleted.

Gary1984

Doing as you suggest would actually increase turbulence as it would increase the chance of a bank run if every customer was entitled to immediately withdraw their cash with minimal penalty. It would also constrain long term lending by banks so would be bad for the economy as a whole.

eskbanker

uk1 said:

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.

But The Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 have a clearly-identified list of contracts exempted from such general cancellation provisions:

These Regulations do not apply to a contract, to the extent that it is—

(a) for—

(i) gambling within the meaning of the Gambling Act 2005(1) (which includes gaming, betting and participating in a lottery); or

(ii) in relation to Northern Ireland, for betting, gaming or participating lawfully in a lottery within the meaning of the Betting, Gaming, Lotteries and Amusements (Northern Ireland) Order 1985(2);

(b) for services of a banking, credit, insurance, personal pension, investment or payment nature;

(c) for the creation of immovable property or of rights in immovable property;

(d) for rental of accommodation for residential purposes;

(e) for the construction of new buildings, or the construction of substantially new buildings by the conversion of existing buildings;

(f) for the supply of foodstuffs, beverages or other goods intended for current consumption in the household and which are supplied by a trader on frequent and regular rounds to the consumer’s home, residence or workplace;

(g) within the scope of Council Directive 90/314/EEC of 13 June 1990 on package travel, package holidays and package tours(3);

(h) within the scope of Directive 2008/122/EC of the European Parliament and of the Council on the protection of consumers in respect of certain aspects of timeshare, long-term holiday product, resale and exchange contracts(4).

k12479

uk1 said:
If however this favoured treatment on the issue of penalties in this industry were treated in the same way as elsewhere, perhaps the turbulence we see might be reduced a little and the industry might be forced to be a touch more competitive and better to it’s customers.

uk1 said:

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.

Aside from all that's already been explained, I struggle to see why the industry is uncompetitive or needs to be more competitive.

There are a huge number of players with a huge number of products in the market, it's hard to claim it's not competitive, as illustrated by the almost daily changes currently occurring. Whether banks need capital and have to offer higher rates or more flexibility to attract it is a different matter. And why do they need to do the 'most', or indeed anything, to retain customers? The importance of customer retention is a business decision, not a customer entitlement.

uk1

eskbanker said:

uk1 said:

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.

But The Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 have a clearly-identified list of contracts exempted from such general cancellation provisions:

These Regulations do not apply to a contract, to the extent that it is—

(a) for—

(i) gambling within the meaning of the Gambling Act 2005(1) (which includes gaming, betting and participating in a lottery); or

(ii) in relation to Northern Ireland, for betting, gaming or participating lawfully in a lottery within the meaning of the Betting, Gaming, Lotteries and Amusements (Northern Ireland) Order 1985(2);

(b) for services of a banking, credit, insurance, personal pension, investment or payment nature;

(c) for the creation of immovable property or of rights in immovable property;

(d) for rental of accommodation for residential purposes;

(e) for the construction of new buildings, or the construction of substantially new buildings by the conversion of existing buildings;

(f) for the supply of foodstuffs, beverages or other goods intended for current consumption in the household and which are supplied by a trader on frequent and regular rounds to the consumer’s home, residence or workplace;

(g) within the scope of Council Directive 90/314/EEC of 13 June 1990 on package travel, package holidays and package tours(3);

(h) within the scope of Directive 2008/122/EC of the European Parliament and of the Council on the protection of consumers in respect of certain aspects of timeshare, long-term holiday product, resale and exchange contracts(4).

Thanks …. yes  … I know.  That was my precise point.

At the moment the finance industry uses it’s exemptions that would preclude them from this penalty in other industries  because they are exempted from this act but bound by another set of regulations, controls and laws which are seemingly in contention.

An overiding obligation is  for example to be “treated fairly” and specifically:

• “Customers will be provided with clear information and kept appropriately informed before, during and after the point of sale.”

Anyone who has spent time at trying to predict how judges will interpret law will know that they often ask difficult questions and interpret as they will.  They are very independently spirited and tend to side with consumers.  One thing I hope we can all agree on is that the word clear cannot be seen to include ambiguity or open to being misinterpreted.  I’m suggesting if it is open to being ambiguous or open to misinterpretation then it could also therefore be accurately described as being “not clear”  That seems to me to be a reasonable concern and it might therefore not be legally enforceable. 

So for example if a consumer opens a fixed term investment and it simply says:

“ On early closure, a penalty equivalent to 120 days' interest applies. No partial withdrawals are allowed. AER tax free based on funds deposited by 01/08/2022.”  ‘’’’’

…. would every non-financial orientated un-savvy consumer realise on that statement alone that they the word “equivalent” has a very important significance  that everyone here might understand but it could be interpreted by the less savvy ie to mean that it means you would lose the first 120 days interest that you have earned.  So it might not dawn on many and their interpretation might be that if it is cancelled after 60 days then you lose 60 days interest.   Would all realise that they don’t only lose all their interest upto 120 days but also  might lose some of their deposits as well.  

I know that everyone here KNOWS that it doesn’t mean that but I can quite easily see a judge finding it to be “insufficiently clear”.  What is missing is the additional phrase along the lines of “This will mean that if you have only invested for a single day, you will receive less than you have deposited because the penalty isn’t limited to the interest you have earned but  is fixed at 120 days irrespective” if you get my drift.  Is it really sufficiently clear? Sometimes it is clearer than others. And my question is if a judge thinks the penalty might be unclear does it then render it unenforceable because it is unlawful with respect to the clarity obligation. 

In addition to that a judge might be asked to consider that there is a contention about whether such a penalty is in breach of the “fairness” responsibility.  Judges are entitled to make such decisions because fairness is not objective but subjective and that is often the main role of a judge.  So might it be unfair to charge different people different penalties, or to ake a profit from a penalty and I do not see it as impossible and therefore unenforceable.   I make the point and I fully accept that many will not see this contention, I was simply interested in what I see as a contention that has yet to be fully tested. I haven’t suffered as a result of this so I’m not debating it out of self-interest but simply being “interested”.

Anyway my purpose in raising it was solely because my professional interest has been 80% in non-financial industry consumer issues and law and very little in the financial arena -  and when I first came across this practice I thought others would find what I thought was an interesting difference something worth chatting about.  I have realised over many years that it is surprising how so few (including merchants) understand their consumer rights and  that sometimes makes comparisons difficult.  Consumers are now allowed to do the most extraordinary things and the law in the UK, and EU whose laws were taken from the UK model allows rights that the majority simply do not realise. I also work with USA client corporations and they are completely bewildered by UK consumer legislation because consumer protection is almost unknown in the US apart from speculative class action stuff.  But the finance industry in the UK to me seems behind rather than in front of day to day consumer protection.  

Lot’s of stuff here is savings related but not directly  about rates or how to churn bank accounts and I incorrectly thought others might share the interest and I’m really inclined to suggest that I was wrong to start the thread and say I hope it gets closed because it’s just become “unproductive” for want of a better description.  

All the best to all. 

masonic

On the point of clarity, I agree that it would be helpful to have a couple of worked examples in the pre-contract information, showing the value of the fee in pounds and pence and making it clear that if you break the fix within the first X days the penalty would exceed the interest accrued. That's potentially a matter that could be picked up with the OFT and/or FCA. It doesn't need new legislation.

If people understood the fee as being, say £20 per £1000 released, then it would be easier for them to come to a decision about suitability for their circumstances.