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The Office
of Fair Trading has laid down that contracts which allow banks
and building societies to vary interest rates effectively at will
for ‘captive’ savers and borrowers are unfair and unacceptable and
must be changed.
The Director General of Fair Trading says:
"I am not seeking to set the level of interest rates or
to stop rates from changing but I am saying that institutions need
to limit their freedom to act to the detriment of consumers by clearly
stating how they intend to operate. The OFT’s guidelines say that
it is acceptable for interest rates to be varied at will only if
consumers are allowed to end the contract immediately and without
penalty. It is also acceptable to vary rates according to the movement
of an external index not controlled by the institution, such as
the rate set by the Bank of England."
The OFT gave examples of arrangements which might be fair:
a) Changes which are agreed in advance
Specific changes agreed in advance with the customer (examples include
an agreement to increase the interest rate on a mortgage by a specified
amount on a specified date).
b) Changes which are applicable across the board
Reserving the right for the deposit-taker or lender to make a change
in interest rates that is being applied to its customer accounts
generally - assuming that these include accounts being actively
marketed and used by consumers who are free to close them without
penalty.
c) An explicit link to an external rate, or index, or openly
marketed rate
Deposit-takers and lenders will explain how rates are explicitly
linked to an external rate, or index or openly marketed rate. If
the linkage does not provide for precise and immediate tracking,
i.e. where rate changes may be rolled up or lag behind market rates,
consumers will be told the maximum margin of difference, and the
time limits within which changes will be made, at the outset.
d) A floor or cap with reference to an external rate, or
index or openly marketed rate
The same principles as in c) apply to terms that allow some discretion
to vary interest rates, subject to a cap or floor that is linked
to an external rate, or index or openly marketed rate. Deposit-takers
and lenders need to explain how rates are linked to the external
index or rate. Any latitude as to when changes are made should be
made clear.
The guidelines also state that:
Lenders who do not effectively limit their discretion to change
rates must:
- Notify each affected customer in writing at least 30 days
before the change and
- Allow them to repay the whole loan during the following three
months without having to pay an early repayment charge
Deposit takers who do not effectively limit their discretion to
change rates must:
- Notify each affected customer in writing at least 30 days
before the change, or if greater
- Give the same length of notice to each affected customer in
writing as the customer has to give for withdrawal of money
- And, in either case, allow the customer within the following
30 days, to withdraw funds, close the account and switch to
another account with the deposit taker without loss of interest
or charge.
September 2000 - A new ruling from The Banking Code Standards
Board. Where rates paid on Tessas are lower than those for comparable
accounts, there must be no penalty for transferring them elsewhere.
The Board recommends there should be no transfer penalties on Tessas
at all, but it cannot make this a requirement as it would go beyond
the (new but still feeble) Banking Code.
If you are locked in to a loan or a deposit (meaning you can't
get out without penalty)...
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