Are ALL early closure penalties actually enforceable and lawful?

masonic

Just to add, here are some Financial Ombudsman decisions around this issue. In all cases the FOS is clear that the institution is entitled to make such a penalty, and the cases centre on whether this was sufficiently made clear to the consumer:

One case upheld, because the terms around early closure were in a separate general T&Cs document, not the product specific one: https://www.financial-ombudsman.org.uk/decision/DRN4934516.pdf

Two cases not upheld, as the customer could reasonably have been expected to understand the terms around withdrawals:

https://www.financial-ombudsman.org.uk/decision/DRN9593351.pdf

https://www.financial-ombudsman.org.uk/decision/DRN-2257260.pdf

The stance of the FOS seems to be that there should be some indication that an early withdrawal penalty can affect capital as well as accrued interest.

So, in answer to the question in your thread title, not ALL early closure penalties are actually enforceable, even if they are lawful.

callum9999

I've completely missed the "general consumer law" that says all holidays are refundable minus provable costs. When did that become a thing? It certainly isn't reflected in the standard booking conditions of hotels, flights, bus/train tickets/package holidays etc.

You're correct that the law does take precedent over contact terms, but it's unusual for the industry to continue using these terms as standard when it's been "firmly established" to be illegal.

hallmark

masonic said:

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.

This is a far bigger issue currently than I remember previously, which I think is because future interest rates are SO unpredictable just now.  I've seen everything from negative IRs to hyperinflation suggested as possible, in both cases as soon as 2023.

It's having a massive effect though. Coventry for example, offer 4.85% on a 3-year bond but only 2.90% on a 3-year ISA.  I don't recall that level of disparity in the past.

uk1

callum9999 said:

I've completely missed the "general consumer law" that says all holidays are refundable minus provable costs. When did that become a thing? It certainly isn't reflected in the standard booking conditions of hotels, flights, bus/train tickets/package holidays etc.

You're correct that the law does take precedent over contact terms, but it's unusual for the industry to continue using these terms as standard when it's been "firmly established" to be illegal.

Today consumers are routinely cheated out of refunds of deposts in holiday bookings, particularly when dealing with cruise lines many of who are based in The Bahamas or Florida as well as UK ones.  And the Ts&Cs that they publish are enforceable if you are an American because as I said upthread consumers have virtually no protection in the US because politics there is all about corporate favour and there is virtually no consumer protection legislation.  The vast majority of Brits buying a cruise for example who cancel are simply told that when they bought the cruise they were told clearly of cancellation clauses and are therefore bound by them which is simply untrue because of the "unfair consumer contract clauses" enshrined in UK consumer law.  So at this stage the vast majority of consumers are unaware of these rights and give up. So an industry benefits because the majority pay and those that demand full refunds minus nominal costs are quietly dealt with so that it doesn't become a "widely known" right and an industry carries on ensuring that it's customers do not benefit from their rights.

Basically UK consumers can ignore almost all small print in purchase contracts without in most cases the need to readthem and that are in contention with "fairness" and other general consumer laws.  The whole presumption in UK consumer law is that that contracts has an imbalance of rights intended to wrongly disadvantage consumers and therefore no clauses that do so are enforceable. Also most consumers are short-changed when holiday companies offer compensation for holidays that were not fully as advertised.  As it happens I was the first consumer in the UK to test this in a five day hearing in the 70's when I took a holiday company to court and was effectively awarded the whole cost of a very expensive vacation with a mixed award of both refund and compensation  for as the judge called it "vexation, agrravation and dissapointment" and my case is still used as a prcedent in complex travel claims.

The consequences of recent consumer law are still very much under appreciated. 

For example consumers no longer need to prove that the items were faulty at manufacture if they go wrong for example in the first 6 months.  There is a prsumption that if an item breaks within say six months then it is automatically presumed to have been faulty at manufacture and a consumer is entitled to either a repair or full refund - their choice - the obligation being on the merchant to prove it wasn't faulty at manufacturer and perhaps "over-used" or "abused" something almost impossible to do.  You could argue that this might be unfair to the merchant.

It is also as we all know here enshrined in consumer law under section 75 that a credit card company is equally liable for responsibility for correcting these issues even if all of an expensive purchase wasn't made through the card.  A credit card company has little influence over promises made by holiday companies and general merchants and this might be seen as unfair to the card issuer but clearly favours the consumer.

This is my pick of one of the most unusual rights that in my experience most merchants and most consumers do not appreciate or understand.  That is  the consquences of having a 14 day cooling off period for purchases not made in retail premises.  Most consumers and many merchants are unaware of this and those that are aware of this in generality are not aware that they need gtive no reason at all for returning an item but the merchant is obligated to provide a full and prompt refund.  Basically the law says that you can order things on line and open and try them as though you were in a shop (and even more ....) and if you decide for any reason whatsoever that you do not want to keep them they can be returned without giving any reasons whatsoever for a full and prompt refund. 

So if Joe Public for example looks out of his patio doors and decides his patio needs a bit of a power clean, he can if he so wishes order a power washer online, clean his patio and return it used and unsaleable as new within 14 days of arrival for a full refund.  And he can repeat this as often as he wants for most items he purchases with very few exclusions.  This doesn't seem to me to be completely fair to a merchant. So Joe Public might buy and use a vacuum cleaner for a week or two and then find it being offered more cheaply elsewhere - or even see a completely different manufacturer and model he prefers the look of and return it "no questions asked" for a full refund.  In my view it seems that there is often no equivalent cooling off rights offered to consumers with all of their finance purchases.  That was an issue that interested me and I found myself wondering whether it was enforeable if tested.

It is against this background that I found myself also wondering whether some of the practices of the finance industry are lawful and all practices enforceable and if they were to fuly reflect the realities of consumer protection elsewhere.  I intended no insults to anyone or upset anyone I just fouind the topic interesting and I thought others might also do so.

EthicsGradient

uk1 said:

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. 

Yes, an "unsavvy" consumer would have the exact same interpretation of "equivalent" as a "savvy" one. You suggest that they might take it to mean "up to, if available", but that is not a meaning of "equivalent" in everyday conversation.

Your comparison of these financial products to holidays cancelled before they are taken is a red herring anyway. The equivalent of a saver deciding, some time into a fixed term deal, that they'd rather move their money to somewhere with better interest is a holidaymaker deciding, a few days into their holiday, that the hotel down the road has a better pool, so they want money back from the travel company for the remaining days and they'll move. 

You keep talking about "consumer protection", but that's not what you're suggesting; you're advocating that a consumer can use a product for a bit, see a new one come on the market, and then get money back on the one they've used, even when the very name of the product says "this is a product for a fixed length of time".

Albermarle

Your comparison of these financial products to holidays cancelled before they are taken is a red herring anyway. The equivalent of a saver deciding, some time into a fixed term deal, that they'd rather move their money to somewhere with better interest is a holidaymaker deciding, a few days into their holiday, that the hotel down the road has a better pool, so they want money back from the travel company for the remaining days and they'll move.

Or like having a bet on a football match, and when your team is 3-0 down at half time, saying you want to cancel the bet.

uk1

hallmark said:

masonic said:

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.

This is a far bigger issue currently than I remember previously, which I think is because future interest rates are SO unpredictable just now.  I've seen everything from negative IRs to hyperinflation suggested as possible, in both cases as soon as 2023.

It's having a massive effect though. Coventry for example, offer 4.85% on a 3-year bond but only 2.90% on a 3-year ISA.  I don't recall that level of disparity in the past.

Consumer law isn't made quickly and is mostly changed when it is politically attractive to do so. Some even because there is no other option.

I have hust had four policies renewed with LV - two cars and two homes where all premiums are substantially less than on last renewal.  This is because the government has made insurers charge existing customers no more than what they charge to entice new customers.  This will over time I guess generally equal out premiums but I don't see any people here squeeling how unfair this is to either the insurers or new customers and I don't think it risks the whole fabric of the insurance industry.  They cope and move on.

hallmark

Yeah and to clarify, I don't think it's unfair, more of an observation of the effect it's having.  Bonds & ISAs were far more in line previously.

uk1

masonic said:

Just to add, here are some Financial Ombudsman decisions around this issue. In all cases the FOS is clear that the institution is entitled to make such a penalty, and the cases centre on whether this was sufficiently made clear to the consumer:

One case upheld, because the terms around early closure were in a separate general T&Cs document, not the product specific one: https://www.financial-ombudsman.org.uk/decision/DRN4934516.pdf

Two cases not upheld, as the customer could reasonably have been expected to understand the terms around withdrawals:

https://www.financial-ombudsman.org.uk/decision/DRN9593351.pdf

https://www.financial-ombudsman.org.uk/decision/DRN-2257260.pdf

The stance of the FOS seems to be that there should be some indication that an early withdrawal penalty can affect capital as well as accrued interest.

So, in answer to the question in your thread title, not ALL early closure penalties are actually enforceable, even if they are lawful.

Thanks, as usual your knowledge of these findings is a valuable resource to these discussions.

What has been imposed by the FO is that a lack of clarity renders the clauseunfair and therefore unenforceable" a contention I highlighted earlier.  Consumer rights legislation needs to catch up with general consumer protection rather than the need to rely on the FO for day to day common sense.

kaMelo

Aside from ISA's, which other fixed rate bond has a penalty clause?

In my experience there is no penalty clause as withdrawal outside of the 14 day cooling off period is simply not possible.