Are ALL early closure penalties actually enforceable and lawful?

uk1

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".

You appear to be unaware that this is exactly the right that a consumer has under the 14 day cooling off period for "distant buying" ie buying online even non-complex products.  Any consumer can buy and use a vacuum cleaner online and send it back within 14 days for a full refund without giving a reason.  Virtually all non-finance products whether fixed length subsriptions or not are governed by this law.

EthicsGradient

uk1 said:

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".

You appear to be unaware that this is exactly the right that a consumer has under the 14 day cooling off period for "distant buying" ie buying online even non-complex products.  Any consumer can buy and use a vacuum cleaner online and send it back within 14 days for a full refund without giving a reason.  Virtually all non-finance products whether fixed length subsriptions or not are governed by this law.

But that's a specific, limited, time period, set by law (and there's a 14 day cooling off period for some financial products, too). You're talking about a general "I want to get out of this contract because I feel like it" privilege.

uk1

Albermarle said:

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.

That’s just silly.  Gambling isn’t covered by consumer protection.  Buying sophisticated finance products should be a fully informed choice with fair penalties.  I have never suggested that there shouldn’t be penalties for early closure.  My question has been how much of a penalty should there be and how clear and unambiguous should such a penalty be.  I believe that the penalty should be very clear and should result as in other consumer law to be broadly neutral.  In other words finance companies should neither lose nor unduly gain advantage. 

You can argue about what I have actually said if you wish but if there is a need to contort in this way it often is an indicator of weak argument. 

uk1

EthicsGradient said:

uk1 said:

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".

You appear to be unaware that this is exactly the right that a consumer has under the 14 day cooling off period for "distant buying" ie buying online even non-complex products.  Any consumer can buy and use a vacuum cleaner online and send it back within 14 days for a full refund without giving a reason.  Virtually all non-finance products whether fixed length subsriptions or not are governed by this law.

But that's a specific, limited, time period, set by law (and there's a 14 day cooling off period for some financial products, too). You're talking about a general "I want to get out of this contract because I feel like it" privilege.

That is exactly what I think there should be. I think it even more important that ISAs should have exactly the same terms as bonds and savings accounts and vice versa and that someone deciding on such issues should always have a short reasonable length “cooling off” time to change their mind. I see no reason why the considerations should be different from other consumer philosophies.  Arguably they should be even more generous because the public understand less about savings and bonds than they do about kettles or holidays. If they change their mind after this cooling off period, I think there should be a debate about whether clauses that forbid this is overly onerous and that a penalty might be then limited to all of the gain but never eat into capital.  The consumer still pays a heavy penalty of losing all their accrued interest and the finance company gets to keep it.  They have gained and the consumer has been penalised. This disincentivises  consumers being overly advantaged for such decisions.  They have lost and will think twice before they cancel presuming that they were clearly informed in advance, which I believe isn’t always true. 

 After that a penalty should be imposed and the loss should be limited but not exceed any of  their gain but   I do believe that a consumer could be penalised so that they have made no gain or earned any interest whilst they have dithered and perhaps pay an administration cost-recovery fee but they should not have what in my view is a grossly severe and unfair loss of capital as well. So there is a fair amount of loss all around.  

I do so hope that this subtle set of suggestions is worthy of reasoned  discussion and I genuinely appreciate understanding well formulated contra argument. 

Albermarle

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

I have renewed three LV policies. In each case the price went up. Presumably previously I had got a good deal and now have to pay the average price.

wmb194

kaMelo said:

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.

They're a lot rarer than they used to be but e.g., Nationwide's branch based, fixed rate savings bonds allow early access with an interest penalty. Its online bonds don't allow withdrawals during the term. The online bonds pay far better interest, though.

Lots of savings bonds don't have cooling off windows e.g., Atom.

https://www.nationwide.co.uk/savings/fixed-rate-bond/

uk1

Albermarle said:

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

I have renewed three LV policies. In each case the price went up. Presumably previously I had got a good deal and now have to pay the average price.

Perhaps this was your “second” year?  

You have however not paid an “average price” but the new law says that your new price must be no more than the lowest price offered to new customers. 

eskbanker

uk1 said:
I think it even more important that ISAs should have exactly the same terms as bonds and savings accounts and vice versa

But ISAs are governed by very specific legislation that doesn't apply to other financial products - you may object to that but that's how the law is at the moment!

uk1 said:
I do believe that a consumer could be penalised so that they have made no gain or earned any interest whilst they have dithered and perhaps pay an administration cost-recovery fee but they should not have what in my view is a grossly severe and unfair loss of capital as well. So there is a fair amount of loss all around.

So are you accepting the principle that early access penalties could exceed interest earned and therefore impact on capital returned, but just contending that some (all?) providers levy charges that you feel are too high, or are you asserting that savers who change their minds should always get back no less than they paid in?

uk1

eskbanker said:

uk1 said:
I think it even more important that ISAs should have exactly the same terms as bonds and savings accounts and vice versa

But ISAs are governed by very specific legislation that doesn't apply to other financial products - you may object to that but that's how the law is at the moment!

uk1 said:
I do believe that a consumer could be penalised so that they have made no gain or earned any interest whilst they have dithered and perhaps pay an administration cost-recovery fee but they should not have what in my view is a grossly severe and unfair loss of capital as well. So there is a fair amount of loss all around.

So are you accepting the principle that early access penalties could exceed interest earned and therefore impact on capital returned, but just contending that some (all?) providers levy charges that you feel are too high, or are you asserting that savers who change their minds should always get back no less than they paid in?

Yes I am accepting that.

I am very clearly asserting that penalties can be the loss of all accrued interest earned and a loss of a recoverable administration fee after a common cooling off period will eat into capital.  

I am arguing against that this could exceed by the amount of an admin fee exceed the capital loss.  But I am also saying that I believe the admin loss is unlikely to ever be defensible much above pennies. 

I am arguing against that the penalty should ever be greater than the total accrued interest and administration cost should then erode capital loss.  I am arguing that anything over and above this is  unbalanced and therefore unfair. If you get my drift.

eskbanker

uk1 said:

eskbanker said:

uk1 said:
I think it even more important that ISAs should have exactly the same terms as bonds and savings accounts and vice versa

But ISAs are governed by very specific legislation that doesn't apply to other financial products - you may object to that but that's how the law is at the moment!

uk1 said:
I do believe that a consumer could be penalised so that they have made no gain or earned any interest whilst they have dithered and perhaps pay an administration cost-recovery fee but they should not have what in my view is a grossly severe and unfair loss of capital as well. So there is a fair amount of loss all around.

So are you accepting the principle that early access penalties could exceed interest earned and therefore impact on capital returned, but just contending that some (all?) providers levy charges that you feel are too high, or are you asserting that savers who change their minds should always get back no less than they paid in?

Yes I am accepting that.

I am very clearly asserting that penalties can be the loss of all accrued interest earned and a loss of a recoverable administration fee after a common cooling off period will eat into capital.  

I am arguing against that this could exceed by the amount of an admin fee exceed the capital loss.  But I am also saying that I believe the admin loss is unlikely to ever be defensible much above pennies. 

I am arguing against that the penalty should ever be greater than the total accrued interest and administration cost should then erode capital loss.  I am arguing that anything over and above this is  unbalanced and therefore unfair. If you get my drift.

I'm not convinced that your arguments are as clear you perhaps believe, and would see 'drift' as being an appropriate word for the way that the arguments seem to be progressing, not that there's anything necessarily wrong with that in the context of an evolving debate of course!  Your edits to that post do seem to have left some inconsistent wording though.

Anyway, to return to one of your earlier points, fairness is quite subjective, so if you're asserting that the scale of penalties is currently unfair, what is your specific proposal to resolve that unfairness?  If you're suggesting, for example, that customers should always get back no less than they paid in, that would penalise institutions in low-interest conditions (remember them?!) where the penalty might fall well short of realistic actual admin costs to enact early withdrawal, so that could be argued to be unfair.

As with your holiday scenario, my recollection is that companies are expected to charge a genuine estimate of their losses, but of course in the real world it isn't as simple as that, and the effort required to assess such losses on a case by case basis would be prohibitive, so they all publish standardised schedules of cancellation charges (x% charged if within y days of departure, etc), which inherently will rarely correspond to the actual losses on any given transaction, so despite the understandable desire for fairness, that doesn't necessarily mean it's achievable.

Ultimately it all comes down to the balloon-squeezing aspect discussed earlier, i.e. that if institutions have onerous terms imposed on them, they'll simply seek compensation elsewhere, e.g. via lower interest rates or whatever.