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ombudsman news

issue 48

August 2005

banking: when a firm decides to close a customer's account

From time to time, banks and building societies ask customers to close their accounts and make alternative banking arrangements. This happens most often if the firm is unhappy with the way in which the customer is using the account, or feels that its relationship with the customer has broken down irretrievably.

Sometimes, customers who are in this situation complain to us. They feel that the firm has no right to close their accounts, particularly if they believe they have done nothing wrong.

This article explains what firms should and should not do in such circumstances, and outlines some cases we have considered recently.

is a firm entitled to close a customer’s account – even without the customer’s agreement-

The general answer is – yes, the firm is entitled to do this. Like most other commercial organisations, banks and building societies are under no obligation to continue doing business with someone if they do not consider it appropriate to do so. But they should not decide to close an account for an improper reason – for instance, because of unfair bias or unlawful discrimination. And it is an implied term of the contract between the firm and its customer that the firm will not normally close the customer’s account without giving reasonable notice.

what is "reasonable notice"-

This is likely to vary, depending on the customer’s circumstances and the type of account. But the general rule is that the firm should allow the customer a reasonable amount of time to make alternative banking arrangements.

The banking code and the business banking code both say that, in normal circumstances, firms should give customers at least 30 calendar days’ notice before closing their accounts. Examples of circumstances which are not "normal" include suspected fraud, or cases where the customer was threatening or abusive to the firm’s staff.

For personal customers, we generally take the view that 30 calendar days is enough time. But a longer period might be more appropriate for business customers. This is because a business is likely to need more time than a personal customer to make the necessary arrangements, particularly if there is an agreed overdraft on the account. Technically, an overdraft is repayable on demand. However, it is quite likely that we would consider a firm had not given a business enough notice if – for example – two months into a 12-month facility it changed its mind for no apparent good reason, and gave the business 30 days’ notice to make alternative arrangements.

Some firms say in their account terms and conditions that they will not close a customer’s account without giving a certain amount of notice. But if that is less than the banking code’s 30 days, then – as in all cases of potential conflict between account terms and conditions and the code – the provisions of the code take precedence.

notice accounts

Some accounts, usually savings accounts, allow customers to withdraw their money only after giving the firm a period of notice. We usually expect a firm to take any such notice period into account if it decides to close the customer’s account. For example, if the firm wanted to close a customer’s 90-day notice account, it should arguably give that customer an equivalent amount of notice – that is, 90 days, rather than just the 30 days specified by the banking Code.

is the firm’s closure notice conditional or unconditional-

Sometimes, firms say they will close a customer’s account at the end of a set period unless certain conditions are met. For example, they might say they will close the account at the end of the notice period unless the customer brings the account balance back to within an agreed overdraft level. But this can give rise to confusion. What if the customer brings the account up to date but then, by the end of the notice period, the account balance has crept back over the agreed overdraft- Has the customer met the firm’s condition or not-

Here, it is important that firms make their intentions clear and unambiguous. Otherwise, we might consider that the customer had met the firm’s condition and it was unfair of the firm to impose the original notice period.

potential loss to the customer

If a firm closes a customer’s account without giving adequate notice, the customer could suffer losses if the firm – wrongly – fails to honour cheque, standing order and direct debit payments. Such losses could be in the form of interest, charges, or late payment fees levied by the intended recipient of the money, or they could flow from the actual failure to honour the payments.

If we decide the firm was wrong to close the customer’s account when it did, we are likely to require it to reimburse the customer with any such direct costs. And if we decide that further adverse financial consequences flowed from the failure to honour payments, and those consequences were reasonably foreseeable by the firm when it decided to close the account, we would generally expect the firm to compensate the customer. For business customers in particular, the firm’s failure to honour a payment could have extensive – and potentially disastrous – financial consequences.

potential distress and inconvenience to the customer

If the customer has suddenly – without adequate warning – been left without access to banking facilities, it is possible that significant distress and inconvenience might result, not least when trying to set up a new bank account. In such circumstances, we are likely to require the firm to pay compensation. The actual amount of the compensation will be individually assessed, to take account of the particular facts and circumstances of the case.

case studies – banking: when a firm decides to close a customer’s account

issue 48 index of case studies

  • 48/8 - firm declines customer’s request for increased overdraft limit and says it will close her account in seven days
  • 48/9 - firm gives company notice to close its accounts after the arrest of company directors
  • 48/10 - because of customer’s unacceptable behaviour, firm says it will write off his overdraft to speed up closure of his account – but it then forgets to take any action
  • 48/11 - firm closes business customer’s account ahead of the agreed date – causing financial losses

48/8
firm declines customer’s request for increased overdraft limit and says it will close her account in seven days

Mrs G had an overdraft of £1,000 on her account with the firm. When it came up for review, she wanted to increase it to £1,500. She had exceeded the existing limit every so often in the past and now wanted to put arrangements on a better footing. But the firm wasn’t happy to do that; in fact, it wanted her to repay all the borrowing.

Mrs G discussed her overdraft on the phone with Mr A, the firm’s lending officer, but things did not go well. Mrs G felt that Mr A was aggressive, while Mr A felt that Mrs G had been rude and unpleasant. The upshot was that Mr A wrote to Mrs G telling her that the firm would not renew the overdraft and that she should repay all her borrowing and close her account within seven days.

When Mrs G complained to the firm’s head office, it said the firm’s action was justified because she had gone over her agreed overdraft limit. That was when Mrs G came to us.

complaint upheld
We accepted that Mrs G had exceeded her agreed overdraft facility from time to time. But she had done so only by small amounts. And the firm had not questioned those excesses before – it had simply let the overdrawn balance increase. We also noted Mrs G’s concern that the firm might register adverse credit information against her name. This was particularly important to her as she worked in the finance industry herself and her employer expected her to have an unblemished credit history.

Mrs G was able to make alternative banking arrangements within a few days. But she experienced some inconvenience in having to do so. We felt that the firm had been wrong to give her only seven days to close her account. We did not accept that her conduct of her account had been such that, under the Banking Code, the notice period should have been less than 30 days. When we told the firm this it offered Mrs G its apologies, together with £250 compensation, which she accepted.

48/9
firm gives company notice to close its accounts after the arrest of company directors

Mr and Mrs J were directors of a company, E Services Ltd. The company’s bank accounts were always in credit – often to a very significant extent – and had never caused the firm any difficulties or concern.

But in mid-November 2004, a photograph of Mr and Mrs J appeared on the front page of the local paper. They had been arrested because it was alleged that their earnings from E Services Ltd had been acquired illegally.

The branch where E Services Ltd had its accounts was in a small town and it was fairly common knowledge that the company banked there. The branch manager was worried about the publicity and, after phoning the firm’s head office for guidance, he wrote to Mr and Mrs J. He said that if they did not close the company’s bank accounts by the end of December 2004, the firm would close them and send the couple a cheque for whatever amount was then left.

In early December 2004, Mrs J complained to the firm. By then, she had been released on bail but her husband was still in police custody. She asked the firm to explain its proposed action, particularly since E Services Ltd had so much money on deposit. And she added that if the firm’s decision was connected with the press reports of her and her husband’s alleged wrongdoing (which she denied), then she thought this was wholly improper and inappropriate.

The firm did not confirm or deny the reasons for its actions, and that led the couple to refer the matter to us. But in the meantime, because the couple had not closed their accounts voluntarily, the firm closed them in early January 2005 and sent Mr and Mrs J a cheque for the balance.

complaint rejected
In its representations to us, the firm did not hide its reasons for wanting to close the accounts. It clearly felt it would run a reputational risk in the local community if, in the light of the publicity, it continued to maintain them. Without needing to comment on that, however, we were satisfied that the firm had given E Services Ltd adequate notice to close its accounts. The six weeks’ notice was rather more than the period required by the Business Banking Code. Moreover, E Services Ltd had not faced the difficulty in finding another bank that it might have done if it had a large overdraft. We did not uphold the complaint.

48/10
because of customer’s unacceptable behaviour, firm says it will write off his overdraft to speed up closure of his account – but it then forgets to take any action

One afternoon, after drinking heavily, Mr F turned up at the bank branch where he had his account. According to the firm, he spoke offensively to several members of its staff before being escorted from the premises.

The following day, Mr F returned to the branch in a similar condition. The manager told him his conduct was unacceptable and that he would be asked to close his account. The manager added that, in order to speed up the process, the firm would write off the £400 by which the account was overdrawn.

Mr F continued to use his account and the firm forgot to close it and write off the overdraft. Some weeks later, Mr F asked for the £400 that – in his view – he had been promised. By that time he had given up his heavy drinking. The firm refused to write off the £400 – on the basis that as Mr F was now behaving in an acceptable fashion, there was no need to close it. That was when Mr F came to us.

complaint settled
Mr F had always managed his money well. His income was paid in to the account and although he used his overdraft facility from time to time, he never exceeded the £500 limit.

We took the view that the bank had been remiss in failing to close the account, as it had said it would. However, given that things appeared to have returned to normal, there now seemed no particular reason for it to do so. And if the account remained open, we saw no reason for the firm to credit Mr F’s account with the £400. But we did think the firm should make some payment to him to reflect its administrative failings. It offered £100, which we recommended Mr F to accept.

48/11
firm closes business customer’s account ahead of the agreed date – causing financial losses

Mr and Mrs L ran a small business. Cash was always tight and they often overdrew their bank account by small amounts, although they did not have a formal overdraft facility. In fact, the firm had refused to grant them one, although it did tolerate (and charge fees for) any borrowing that arose.

Shortly after a new bank manager took over, the couple found that the leeway they had previously been allowed stopped without any warning. They went to see the new bank manager, but she refused to budge. The meeting was far from cordial and a few days later she wrote to Mr and Mrs L telling them to close their account by the end of the month. That was just under four weeks away.

The couple set about finding a new bank. Meanwhile, the firm closed the account a few days earlier than it had said it would. That meant that a number of cheques and other payments were left unpaid when, had the account remained open just a few days longer, there would have been enough money available to pay them.

The firm’s actions caused Mr and Mrs L a number of problems. Not only did they incur extra interest and late payment charges on their credit cards (which should have been paid by direct debit), but one of the dishonoured cheques had been payable to their main supplier. He immediately shortened the credit terms he offered them – from 30 days to one week. And for several months he would only accept payment from them in cash.

Mr and Mrs L complained to the firm, claiming direct financial losses of around £5,000, plus a further £2,500 for their " distress, anxiety, frustration and sleepless nights over many weeks, along with the need to re-build our relationship with our supplier".

In response, the firm accepted that it had closed the account a little too soon. But it refused to accept that the couple had suffered anything like the loss or inconvenience they claimed. It offered them £300 in compensation.

complaint upheld
We were satisfied that Mr and Mrs L had genuinely expected the firm to make several payments before the account was closed. And if that had happened, some of the charges would not have been incurred. These amounted to about £150. We also accepted that the dishonour of the supplier’s cheque had a significant effect on the couple’s trading and their cash flow. We valued this at £4,000. On top of that, we felt the firm’s actions had caused the couple unnecessary distress and inconvenience – but we felt that they were claiming rather too much for this. Overall, we recommended the firm to pay Mr and Mrs L £4,750.

The firm continued to argue – very strongly. It sought to persuade us that the way in which the couple had run their account had always been unacceptable. But we explained that, even if the earlier overdrafts had not been formally sanctioned, the firm had allowed them to arise over quite some time, and it had charged its usual " penalty" fees and interest for their overdrawing without its consent.

Ultimately, we had to decide the complaint formally, rather than through mediation and conciliation. This was primarily because we felt the firm’s later arguments were demonstrably misplaced – leading to the matter remaining outstanding for longer than it should have been. We eventually required the firm to pay Mr and Mrs L £5,000 in final settlement of their complaint.

Walter Merricks, chief ombudsman

ombudsman news issue 48 [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.