Crackdown on banks automatically renewing savings bonds unfairly
A number of banks have been rapped for unfairly automatically renewing savings bonds.
The Financial Conduct Authority (FCA) -- the UK's financial watchdog -- is set to crack down on firms selling fixed-term savings bonds that automatically reinvest into follow-on bonds. This follows a wider FCA review of automatic renewals in which it found widespread evidence of unfair practices and contract terms.
What are fixed-term bonds?
Fixed-term bonds -- also known as fixed rate bonds, including fixed-rate cash ISAs -- are widely sold by banks, building societies and other providers to savers.
Customers depositing lump sums into these low-risk savings products tie up their money for a fixed period in return for a guaranteed, fixed rate of interest. A wide range of bonds is available, varying according to term (usually six months to five years), the interest rate paid, and the minimum and maximum deposits allowed.
During the term of these bonds, early access and withdrawals are usually forbidden, or are penalised by a loss of accrued interest. As maturity approaches, providers contact savers, normally inviting them to choose how to use their maturing funds (which consist of a lump sum plus interest). These options include full or partial withdrawal, reinvestment in another bond or other investment, and transferring their cash to a nominated savings account.
However many firms operate automatic renewals that deny savers the right to decide before maturity what should happen to their money. Instead of transferring savers' cash into instant-access accounts, these firms reinvest customers' money into new fixed-term bonds.
Why is the FCA worried?
In 2011, the Financial Services Authority (FSA, the forerunner of the FCA) received a number of complaints from savers about automatic renewal of fixed-term bonds.
Customers protested that, instead of being available for withdrawal on maturity, their funds were being automatically locked into new bonds for further fixed periods. Also, savers were unhappy at some firms introducing mid-term automatic renewal terms that they felt were unfair because they came into effect partway through contracts.
As a result, the regulator began investigating two areas: the fairness of providers' automatic-renewal contract terms and the fairness of firms' practices.
During its review, the FCA contacted 30 providers of fixed-term bonds, demanding details of their contracts and practices regarding automatic renewal. This sample of firms included the UK's largest sellers of savings bonds, plus providers appearing in best buy tables.
The good news is that 14 firms confirmed that they do not operate automatic renewal. The bad news is that the FCA identified concerns about the other 16!
Treating savers unfairly
The FCA found evidence of unfair contract terms and unreasonable company practices at the majority of the firms reviewed. Fortunately, where the FCA raised concerns with these firms, they have reacted positively and taken steps to change their contract terms and/or practices.
The FCA's view was that automatic-renewal terms are likely to be unfair when the interpretation of the term is at the firm’s discretion. For example, a contract term may give the provider the right to reinvest maturing funds into whichever bond it considers 'appropriate' for savers. Of course, what is appropriate in the firm's eyes may not be at all satisfactory to savers simply expecting their money back at maturity.
As a result the FCA has forced firms to amend the wording of their terms to restrict their discretion when automatically reinvesting customers' maturing funds. For instance, funds may only be reinvested into bonds of similar duration and with the same access rights as the original bond.
Looking into firms' practices, the FCA expressed concern about mid-term variations of fixed-term bond contracts to introduce automatic renewal. Where firms had introduced, or planned to introduce, mid-term automatic renewals, the watchdog's view was that such variations would be unfair.
It argued that introducing new features beyond the original terms and conditions "fundamentally changes the nature of the contract". All firms have agreed not to introduce mid-term renewals from this point forward.
The watchdog was also unhappy that some firms offer short notice periods ahead of maturity, not giving savers enough time to make informed decisions. For example, a two-week notice period is no use if a customer is on holiday for that entire fortnight.
The watchdog found similar problems with cooling-off periods, with customers only given a short time during which they could cancel investment in a new bond and withdraw their funds without penalty. In some cases, savers were given no cooling-off period whatsoever. Again, the FCA has instructed providers to give savers reasonable time to change their minds.
Finally the regulator is cracking down on opt-out procedures and the clarity of communications sent to savers. Some firms did not make clear the various options available to savers upon maturity, or how to opt-out of automatic renewal. Again, awkward or unclear opt-out procedures put savers at a financial disadvantage, so the FCA has told firms to improve the clarity of their communications.
They should also explain to savers that automatic renewal is not mandatory and customers are entitled to withdraw their maturing funds.
More crackdowns to come
This is by no means the end of the FCA's work into automatic renewals.
Indeed, the financial watchdog is digging even deeper into this murky world, focusing on home and motor insurance policies. The FCA expects to publish this follow-up report in 2014, which could lead to big changes in how home and motor insurance treat policyholders when contracts are renewed.
For example, it could stop insurers from charging renewing customers higher premiums than new customers.
Shop around for top savings rates
Whenever you decide to put money into fixed rate savings bonds, make sure you know exactly what you're getting into. Check carefully to make absolutely sure that you know the bond's duration, fixed interest rate, any penalties for early access, and what your options are on maturity.
As soon as your deposit is made, mark a date in your calendar or diary in advance of maturity. This will be a useful reminder to make sure that you make the most of your funds by always shopping around for the best rate before reinvesting!
Compare the rates available on savings accounts with Lovemoney
More on savings:
Interest rate shock ahead for sensible savers
Bad news for savers as inflation rises to 2.9% in June
The best fixed rate savings bonds
Where to earn most interest on your cash
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Comments
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i need help on this subject my father has some money in a fixed rate savings bond which he said matured last april now me and him are buying a house together since he s been diagnosed with dementia i have applied for lpa which i pick up this week when dad tried to transfer his bond to his current account online it said no as its not matured but it matured last april so i think it must have auto renewed itself, alhough they claim to let you know it writing i could find no evidence of any letter at my dads house as we have paid a large deposit already on an auction property we need the remainder of the monies from the bond within 2 weeks what can we do
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There is a flip-side to this: If you are fully aware of what the 'roll-over' involves in terms of continuing or exiting, then the 'roll-over' can be very efficient. We have several accounts with building societies, principally to maintain our voting rights, but also to save and even obtain a mortgage. One building society rolls-over with a 30 day opt-out: this works well and we generally continue; another doesn't, but this means that we have to jump through hoops to renew... obtaining my son's signature now that he's living away, plus permission for me to transact on his behalf, then to go to the nearest branch - an hour's bus-drive away, then find that for some quaint historical reason they close at 16:30 rather than 17:00 and the next day go to another branch. The simple roll-over would suffice! The 3.2% regular saver with Barclay's Bank usually takes a week to re-instate on maturity... they really wish you transact over the phone via their Indian call-centre... but you need a current account or a phone pin... I have neither: they had withdrawn my dormant current account without informing me [reason given - you might have moved - I haven't, still here after 30+ years!]... you have to go into a branch to request the phone pin... I have, but never received one! We have already transferred more than 10% from savings to share self-select ISA's in recent years!
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It is our own fault I am afraid. Despite people hating the banks nobody does anything about it and the Government (and by that I mean Parliament of whatever party), whilst pretending not to support the banks, in fact does exactly the opposite. A small fine on a bank is just passed on to customers so this is no punishment to them. Only "the Bank of Dave" has in any way tried to fight them and even Dave was forced to set up a Credit Union because of the seriously fixed banking rules (supposed to protect our savings but in reality protects the Banks). The only way to deal with this is for savers to seriously withdraw their funds (say 10% as an opening shot). They will only look after us if it is they that lose serious money and 10% of their total bank savings might make them think again. I don't suppose people will go for this though so I guess we get what we deserve.
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08 February 2016