Banking law

Different rates of interest - unfair treatment - judicial review of ombudsman's decision

R (on the application of the Norwich and Peterborough Building Society) v Financial Ombudsman Service Ltd [2002] EWHC 2379 (Admin), Mr Justice Ouseley

In this case, a complaint was initially made to the Building Societies Ombudsman in respect of the decision of the Norwich and Peterborough Building Society (N&P) to apply, for a period of time, different rates of interest to its tax exempt special savings account (TESSA) and individual savings account (ISA) accounts.

Following the completion of the ombudsman process N&P brought a judicial review of the final decision of the ombudsman.

The facts of this case are relatively straightforward.

Mr Jones opened a TESSA Select account with N&P in September 1998.

In April 1999, TESSAs were replaced with a new vehicle for tax-free savings called ISAs.

After the introduction of ISAs no new TESSAs could be formed, although existing TESSAs could continue to exist.

In May 1999, Mr Jones opened a mini-cash ISA with N&P.

N&P operated a third type of account relevant to this case, namely a TESSA-only ISA or TOISA.

This account was available to customers whose TESSAs had matured and who wished to utilise another vehicle for tax-free savings for a further five years.

Mr Jones' TESSA had not matured and he was not in a position to open a TOISA.

N&P first offered a mini-cash ISA from 6 April 1999.

From that date until 20 September 2000, N&Ps rates of interest paid on its ISA and TOISA accounts were identical and always higher than the rates of interest paid on its TESSA accounts.

On the 20 September, N&P equalised the rates on its accounts by increasing its TESSA rates and not by decreasing its ISA and TOISA rates.

Mr Jones complained to N&P about the fact that he was receiving lower rates of interest on his TESSA than his ISA account and then subsequently brought his complaint to the ombudsman.

Mr Jones claimed that N&P's action constituted unfair treatment contrary to part III paragraph 1 of schedule 12 to the Building Societies Act 1986.

When dealing with complaints in relation to unfair treatment the ombudsman is required to have regard to, among other things, the provisions of any applicable code of conduct.

In this case the applicable code of conduct was the Banking Code, 1998 revision.

The ombudsman based his final decision on two main grounds, his interpretation of the provisions of paragraphs 2.17 and 2.18 of the Banking Code and, in part, the application of the 'relative onerousness test'.

The relative onerousness test was employed by the ombudsman to assist in the determination of what constituted unfair treatment.

The test involves a comparison of interest rates and onerous terms applying to different deposit accounts operated by the same deposit taking institution.

After the comparison has been completed where a deposit taking institution pays a lower rate of interest on an account which has more onerous conditions than another account to which a higher rate of interest is applied, a finding of unfairness in likely.

In his final decision the ombudsman found that there was no unfairness in the difference in interest payable between the TESSA and ISA accounts.

However, he found that N&P had acted unfairly in paying less interest on its TESSA accounts than on its TOISA accounts because the terms of the TOISA as to notice and loss of interest were less onerous than the equivalent terms of the TESSA.

As a consequence of that finding, the ombudsman ordered N&P to pay compensation to Mr Jones measured by the difference between the two interest rates for the period from 6 April 1999 to 11 September 2000.

Compensation ceased to be payable by N&P for the period after 11 September 2000.

On this date N&P had written to Mr Jones and told him that he could move his account to another TESSA provider without having to give notice or suffer an interest penalty.

The ombudsman's decision was that unfairness in paying lower interest rates could be remedied either by equalising rates or informing account holders that they could move account without notice or penalty.

The judge noted that Mr Jones did not move his TESSA account because N&P's interest rates were generally better than elsewhere.

N&P challenged the final decision of the ombudsman on two main grounds.

Firstly, that the finding of unfairness involved a misconstruction of the Banking Code and, secondly, that the relative onerousness test was irrationally applied and illogical.

In a detailed and lengthy judgment, Mr Justice Ouseley held that the ombudsman had misinterpreted the Banking Code and so failed to have regard to it when reaching his decision.

However, the judge also held that the ombudsman's view of unfairness did not go beyond the scope of the broad concept of unfair treatment and was not irrational.

Consequently, the application was dismissed.

This is a significant case.

The approach to be adopted when interpreting the Banking Code has now been settled for the benefit of the determination of future complaints to the Financial Ombudsman Service.

The code 'requires a broad, purposive and common sense approach.

It is to be interpreted according to its spirit and in a non-technical way'.

The code is not to be treated as if it had an answer to every situation.

Contrary to former practice, it is not open to the ombudsman to read into the code any substantive provisions so as to accord with the ombudsman's view of fairness.

Despite the restriction placed on the ombudsman in his interpretation of the code, the decision still manages to reinforce the view that the ombudsman scheme is a quick and inexpensive means of dispute resolution where the decision of the ombudsman is unlikely to be impeached on a judicial review.

The judge stated that the width of the concept of unfairness 'serves as a caution against over-active judicial intervention in the approach adopted by the ombudsman, in the criteria which he develops or in the application of those criteria or of the concept of unfairness to the circumstances of the case'.

Finally, the decision provides guidance to both investors and deposit taking institutions as to the likely response of the ombudsman where a complaint is made that different interest rates are applied between TESSA and other accounts, such as ISAs or TOISAs.

A finding of unfair treatment by the ombudsman seems likely to arise where an investor holds funds in a superseded account, such as a TESSA, which pays less interest and has more onerous terms than another account operated by the same deposit taking institution.

Any such unfairness may be remedied and compensation reduced by equalising rates or by notifying the investor that he could freely move his deposit.

See law reports, page 30 (see Gazette [2003] 23 January)

By Simon Sugar, barrister, 36 Bedford Row, London