skip tocontent

ombudsman news

issue 60

March/April 2007

investment and banking administration complaints - issues involving the end of the tax year

A number of the investment and banking disputes we see arise from errors in administration. If these errors occur towards the end of a tax year, they may result in deadlines being missed and consumers losing the opportunity to benefit from tax advantages.

We sometimes see examples of this when a business has promoted its ISAs (individual savings accounts) very strongly in the lead-up to the end of the tax year, and has then attracted a larger volume of applications than it is able to process within the required timescale.

Where an administrative error leads to a consumer losing out on a tax advantage, disputes can arise over whether the business responsible for the error should compensate the consumer - and about how any such compensation should, reasonably, be calculated.

In the disputes referred to us, we often find that any loss is actually relatively small. Indeed, sometimes there has been no quantifiable loss at all. As ever, each case turns on its own individual facts. But we sometimes consider it appropriate for the business to pay the customer a modest amount in recognition of the inconvenience that its error has caused, even where the customer has suffered no loss.

The following case studies illustrate some of the complaints we have dealt with - and how we have approached the issue of compensation.

case studies

investment and banking administration complaints - issues involving the end of the tax year

issue 60 index of case studies

  • 60/6 - administrative error results in negligible loss but business makes a small compensation payment to the customer as a goodwill gesture
  • 60/7 - bank rectifies its administrative error and makes a payment for the distress and inconvenience it caused
  • 60/8 - customer said building society's delay had caused loss of opportunity for the proceeds of her TESSA
  • 60/9 - bank and customer unable to agree on appropriate measure of compensation

60/06
administrative error results in negligible loss but business makes a small compensation payment to the customer as a goodwill gesture

Mr T complained that he had been disadvantaged when the business failed to carry out his instructions to invest £7,000 in a Maxi ISA for the 2002/03 tax year. The business accepted that it had made a mistake and it offered him £200 as a gesture of goodwill.

However, Mr T thought he was entitled to a larger sum. He said that this compensation should be based on the fact that he had been planning to keep his money invested in the ISA for 25 years.

The business did not agree, so Mr T referred the complaint to us.

complaint rejected
Mr T produced evidence that he had used his tax allowance in previous years and had not cashed-in any of these previous investments. So we accepted that, in all probability, he had intended to invest for an indefinite period.

However, what he had lost out on was the potential tax advantage on the return from his investment, not on the whole of the capital sum invested. He was a basic-rate taxpayer, so the tax advantage he had lost out on in March 2003 related to the 10% tax credit on the dividend paid each year.

This tax credit was abolished at the end of the 2004/05 tax year. That meant that Mr T had only lost out on it for two years. Taking his overall financial position into account, it seemed unlikely that he would be liable for capital gains tax when he cashed-in his investment. So we concluded that his actual loss had been modest.

We rejected the complaint and recommended that Mr T should accept the goodwill offer of £200 that the business had already made, as we thought this was fair and reasonable in the circumstances.

60/07
bank rectifies its administrative error and makes a payment for the distress and inconvenience it caused

Ms M, who had several different ISAs with bank A, asked it to transfer her cash ISA to bank B, and to cancel her direct debit for monthly payments into the cash ISA. Unfortunately, bank A made a mistake and transferred all Ms M's ISAs, not just her cash ISA. It also cancelled all the direct debits that related to her ISAs, not just the one for payments into the cash ISA.

When she discovered what had happened, Ms M contacted bank A to complain. It retrieved from bank B all the funds that it had transferred in error. But because bank A had cancelled all the associated direct debits, Ms M had not been able to make her usual monthly payments into her ISAs. So bank A asked Ms M to send a cheque to cover the missed payments. It said it would then buy units for her at the best available price, and bring the unit-holdings in her remaining ISAs up-to-date. Once it had done this, Ms M then transferred all her investments to bank B and complained to us about bank A's mistake.

complaint settled
Bank A said it had taken the necessary steps to restore Ms M to the position she would have been in, if it had not made the error. It had also sent her a cheque for £25 as a gesture of goodwill, in recognition of the inconvenience it had caused. So it did not consider she was entitled to further compensation.

Ms M said she had only needed to transfer her investments to bank B because of bank A's mistake - so she thought bank A should pay the transfer charges she had incurred. We did not agree that bank A should pay these costs. It had acted swiftly to put matters right - and it had been entirely her own decision to transfer.

However, it was clear that Ms M had suffered distress and inconvenience. With this in mind, and by way of an apology, the firm agreed to increase its goodwill payment from £25 to £100. We told Ms M we thought this was reasonable and we recommended that she should accept it.

60/08
customer said building society's delay had caused loss of opportunity for the proceeds of her TESSA

Mrs B had a Tax Exempt Special Savings Account (TESSA) with her building society. This was due to mature in March 2004. In January 2004, the building society wrote to her setting out the options available to her when the TESSA matured. These included transferring the proceeds into a TESSA-only ISA, so that she could preserve the tax-exempt status of these savings. However, this transfer would have to take place within six months of the TESSA's maturity date.

Shortly before the end of the six months, Mrs B decided instead to invest the proceeds of her TESSA in a cash ISA with her bank. The bank gave her a form to sign, authorising it to apply direct to the building society to transfer the proceeds of the TESSA into the new cash ISA.

Unfortunately, the building society mislaid the form. By the time it had found it and arranged the transfer, the deadline had passed. Mrs B complained to the building society and claimed compensation for the loss of the tax-free interest she said she would have received, had the transfer gone ahead in time.

complaint rejected
When we looked into the complaint we found that before the TESSA had matured, Mrs B had already opened a cash ISA for the tax year in question - with a different bank. It appeared she had not understood that it was not permissible to have more than one cash ISA during the same tax year.

So even if the building society had carried out her instructions promptly, this would not have preserved the tax-exempt status of the TESSA proceeds. That could only have happened if Mrs B had transferred the TESSA proceeds into a TESSA-only ISA account.

We did not think the building society could reasonably have realised the mistake that Mrs B was making. So we did not accept that it could, fairly, be held responsible for the loss of the tax advantages. The building society had offered Mrs B £50 as a goodwill gesture and we recommended that she should accept it.

60/09
bank and customer unable to agree on appropriate measure of compensation

Mr G applied to open a cash ISA with his bank for the maximum annual holding of £3,000. After promoting this investment very heavily in the weeks leading up to the end of the tax year, the bank had received so many applications that it was unable to process them all in time. Unfortunately, Mr G's application was one of those that the bank failed to process before the tax deadline for that year.

The bank offered Mr G compensation, based on the amount of tax he would have saved over two years, if his application had been processed on time. However, Mr G said that since there was no set maturity date for cash ISAs, the compensation should be based on the likely tax saving over the rest of his lifetime, or at least until he retired - in 15 years' time. The bank did not agree, so Mr G complained to us.

complaint upheld in part
In view of Mr G's overall financial position, we thought it would be fair to assume that he would have held the cash ISA for five years, and to calculate compensation on this assumption. Customers looking to use some of their savings tend to turn first to cash deposits of this type.

And although the current government has recently given a commitment to continuing the ISA regime, there is no guarantee that ISAs will continue indefinitely.

Because tax and interest rates for the coming years cannot be predicted precisely, we thought it would be fairest to base the calculation on current rates. We made no reduction to take account of the fact that the compensation payment represented a lump sum payment - in advance - for tax savings that would otherwise have accrued gradually over five years. Equally, we did not make any additional award for inconvenience caused by the bank's error.

image of ombudsman news

ombudsman news issue 60 [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.