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ombudsman news

issue 33

November 2003

banking - mistaken credits

There is a kind of mistake that can make some customers happy. That is where the firm mistakenly credits a customer's account with money that the customer is not entitled to. Some customers feel they should be allowed to keep the money, simply because the firm has made a mistake.

Similar issues arise where the firm mistakenly understates how much a customer owes on a mortgage or other loan. Sometimes the customer then considers that the firm must accept the figure it has mistakenly quoted, rather than the higher - true - figure.

What is the fair outcome to such cases-
In particular:

  • does the customer have to repay the money-
    If so, on what terms- Is any compensation due-
  • in dealing with such cases and deciding what is fair and reasonable, we are required to take into account what the law says. In general terms, the legal position is:
  • ordinarily, customers should repay money that does not belong to them, or that they have borrowed.
  • but customers do not have to repay it if they have "changed their position" through believing, in good faith, that the money was theirs - for example, by buying some expensive service that they would not otherwise have bought. Merely spending the money on ordinary, day-to-day expenditure does not amount to a change of position.
  • if customers have changed their position, then they are not required to show that, if they repaid the money, they would be worse off than before they received it. But it must still be the case that it would be unfair for the customer to have to repay the money.
  • as long as the firm's mistake has caused the change of position, it does not matter if the firm did not expressly represent to the customer that the money belonged to the customer.

Clearly, customers must pay money back if they did not genuinely believe it was theirs. But sometimes, even though they accept that they must repay the money, they are unhappy about how the firm treated them or their account.

The following case studies illustrate how we apply these principles in practice.

case studies - mistaken credits

33/1
mistaken credit used to pay bills

The firm mistakenly credited Mr B's current account with £3,000 intended for another customer with a similar name. By the time the firm realised its mistake, Mr B had withdrawn the money. He said he had thought it was a payment he had been expecting for some work he had done, and he claimed he had used it to pay back some money his brother had lent him. When the firm continued to chase Mr B to repay the £3,000, he complained to us.

complaint rejected

Even if Mr B had genuinely believed the money was his, his position had not changed. Previously, he had owed his brother £3,000. Now, he owed the firm £3,000. We told him he would have to pay back the money but, because the firm had been responsible for the mistake, we said it should allow him to pay it back in interest-free instalments.

33/2
mistaken credit where a second loan should have been used to repay a previous loan

Ms K had taken out a £3,500 loan with the firm (loan 1). She also had an overdraft of about £750 on her current account with the firm and she was finding it difficult to keep within the overdraft limit.

In order to repay loan 1 and reduce her overdraft, the firm agreed to grant her a new loan of £4,000 (loan 2). But instead of using most of loan 2 to repay loan 1, the firm paid all of it into Ms K's current account. Within days, Ms K had spent all £4,000 - the majority of it in just one visit to a designer shoe shop.

When the firm contacted her, she said she had not realised it had made a mistake - she had assumed the money was hers. She did not agree with the firm's demand that she should repay both loans.

After Ms K brought her complaint to us, the firm offered to compensate her for the distress and inconvenience its mistake had caused her. But it still insisted that she had to repay the two loans, although it was prepared to let her repay the money over a number of months.

complaint rejected
The firm was able to provide tape recordings of its telephone conversations with Ms K, during which it had discussed and agreed loan 2 with her. We were satisfied that Ms K could not reasonably have expected the money paid into her current account to be anything other than the proceeds of loan 2.

We concluded that she must have known the payment was a mistake, and that she had not spent the money in good faith. So it was only fair that she should repay loan 2 (as well as loan 1). We thought the amount of compensation that the firm had offered her for distress and inconvenience was more than adequate, so we did not agree with her request to increase it.

33/3
mistaken credit led to freezing of current account

Mr W's solicitors paid £90,000 into his current account with the firm. He told the firm to use £80,000 of that to open a new savings account. The firm debited the current account with the £80,000 but failed to open the new savings account.

Meanwhile, the solicitors mistakenly paid a second £90,000 into Mr W's current account. So, when he checked the balance, he assumed the firm had not yet debited the £80,000 destined for the new savings account.

A few days later, the solicitors informed the firm and Mr W of their mistake. The firm froze Mr W's current account, which prevented him from making a payment in connection with his business. And the failed payment caused a financial loss to Mr W's business of £70,000.

complaint upheld
Following an oral hearing, we were satisfied that Mr W was blameless. He had not realised the extra money had been paid into his current account. He had made no attempt to remove it, and he fully accepted that it should be repaid to the solicitors.

The firm had no right to freeze Mr W's current account - especially when he was £90,000 in credit. And it could not avoid liability by claiming that the £70,000 loss was not a reasonably foreseeable consequence of maladministering a personal current account. We were satisfied that Mr W had clearly warned the firm of this consequence when it froze the account. So we awarded him the £70,000, plus interest, and £750 for the substantial distress and inconvenience to which the firm had put him.

33/4
mistaken credit - understated mortgage redemption

Mrs O decided to move her mortgage from the firm to another lender. Her solicitors asked the firm for a "mortgage redemption" statement - a statement showing the amount she needed to pay in order to clear the mortgage.

By mistake, the firm quoted a figure of £55,000 - £2,000 less than the correct figure of £57,000. Mrs O then took out a £55,000 mortgage with the new lender, and her solicitors sent the £55,000 to the firm to pay off the old mortgage.

At that point, the firm realised its mistake. It asked Mrs O to pay the extra £2,000 - although it agreed to accept this in interest-free instalments and to compensate her for the inconvenience she had suffered. Mrs O felt that she should not have to repay the £2,000 at all. Unable to reach agreement with the firm, Mrs O referred the matter to us.

complaint rejected
We felt that Mrs O could not have been expected to know that the redemption statement was wrong. She had relied on the statement when she applied for her new mortgage. But her position had not changed as a result. If the firm had given her the correct figure, she would have borrowed £57,000 from the new lender. So she would then have owed the £2,000 (with interest) to the new lender. We did not think it was unfair to expect her to repay the £2,000 to the firm (interest-free).

We considered that the terms on which the firm wanted her to repay the money were fair, as was the compensation it had offered for her inconvenience.

Walter Merricks, chief ombudsman

ombudsman news issue 33 [PDF format]

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.