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ombudsman news

issue 63

July/August 2007

banking, insurance and investment case studies involving young consumers

Younger people are just as likely to have bank accounts and some types of insurance - such as motor and travel policies - as other age groups. Yet our research into the types of consumers who use the ombudsman service shows that younger people are proportionally less likely to bring disputes to us than those from older age groups.

This can be explained to a certain extent by the fact that young people are less likely to have a wide range of savings, investments and pensions - and the products they do have are generally quite straight forward. The investment and pensions disputes we handle are generally from people aged over 50, and the mortgage-related complaints we see are mostly from those over 35. In part, this probably reflects the fact that first-time home-buyers are now older than they once were, as a result of house-price increases over the last decade and other socio-economic reasons.

This selection of case studies shows that problems relating to financial services can produce difficulties that have a particular impact on young people, given that young people frequently have more fluid lifestyles and are generally more likely to be less financially stable than older consumers.

case studies

banking, insurance and investment case studies involving young consumers

issue 63 index of case studies

  • 63/1- bank failed to keep customer properly informed about her overdraft
  • 63/2 - student customer gets into debt after using his new credit card for on-line gambling
  • 63/3 - young customer on limited income given successive consolidation loans
  • 63/4 - bank did not keep to the agreed "repayment holiday" on a graduate loan
  • 63/5 - young customer found herself in difficulty when her financial position changed
  • 63/6 - apprentice inappropriately advised to take a with-profits endowment policy as a means of saving
  • 63/7 - commercial motor insurance policy - keys left in the vehicle - whether the policyholder had taken reasonable care
  • 63/8 - travel insurance policy - theft of personal possessions from a camper van while travelling
  • 63/9 - motor insurance policy - daughter was "named driver" on parents' car

63/01
bank failed to keep customer properly informed about her overdraft

Ms W, a 21 year old language student, had held a student account with her bank since she started at university. As an important part of her course, she went to study in Germany for several months. Before she left, she made sure the bank had details of where she would be staying while she was abroad.

When she returned to the UK, Ms W was very distressed to find that the bank had called in her overdraft. It had also registered her with credit reference agencies as a "defaulting customer". She complained to us that the bank had acted unreasonably by failing to warn her and give her a chance to remedy matters.

complaint upheld
Ms W's account had already been overdrawn when she left the country and she did not pay any money into it while she was away. We were satisfied that the bank had attempted to contact her on a number of occasions, asking her to reduce her overdraft. However, the bank had mistakenly sent the letters to her university address in the UK.

We did not feel the bank had given Ms W a reasonable chance to respond to, or act upon, its request to reduce her overdraft.

So we did not think it reasonable of the bank to have transferred Ms W's account to its debt collections department or to have registered her as a defaulter with credit reference agencies.

Luckily, Ms W had not been relying on the account while she was abroad. However, the default was shown in her credit history. This was potentially very damaging, since she was applying for research funding for her post-graduate studies.

The bank agreed to our suggestion that it should take her account back from its debt collections department, stop the recovery action and remove the adverse credit data it had registered in Ms W's name. We also asked it to reduce Ms W's debt by £250 to reflect the distress and inconvenience she had suffered.

Once she had checked that her research funding would not be affected, Ms W confirmed that she was satisfied with the proposed settlement. She then arranged to make regular payments over the next few months to clear her remaining overdraft.

63/02
student customer gets into debt after using his new credit card for on-line gambling

Mr D was a 20-year old computer studies student, living at home with his parents and working part-time at a local supermarket. He applied successfully for a credit card and was given a credit facility of £1,000.

Mr D started using the card for on-line gambling and quickly spent up to his credit limit. He soon found it impossible to reduce the size of his debt on the card. He then complained to the card issuer, saying it should take full responsibility for the debt. He said it had acted irresponsibly by giving him a credit limit so large that he had been tempted to pursue on-line gambling.

complaint not upheld
We looked at the evidence Mr D had provided about his income and outgoings. Although his income was not large, we felt that - when considered alongside his low outgoings - he earned enough to justify the credit limit set by the card issuer. We noted that, once Mr D had reached his card's limit, the card issuer had acted quickly to prevent any further borrowing.

We did not consider it was the card issuer's fault that Mr D had spent up to his credit card limit so quickly. And we pointed out to Mr D that the card issuer had no duty to monitor what he spent the money on. The card issuer had offered Mr D a generous interest rate concession to help him repay the debt. We thought that, in the circumstances, this was a very reasonable offer and we recommended Mr D to accept it.

63/03
young customer on limited income given successive consolidation loans

Miss E was in her early 20s and working part-time while she was studying to be a beauty therapist. In September 2005 she contacted the bank where she had a current account and asked if she could borrow £6,650.

The bank agreed to this and within the next six months she applied successfully for two further loans, one of £8,500 and one of £10,500. Each new loan consolidated the previous one.

By May 2006, Miss E found herself with a debt that she had no realistic means of repaying. She complained to the bank, saying she took a responsible attitude to her finances and wanted to repay the money, but could see no way forward with a debt so large. She felt the bank should have considered her ability to repay before lending her such a large sum, and she said the bank was responsible for her present predicament.

complaint upheld
First appearances suggested that Miss E was earning enough to support her borrowing. The loans all appeared to have been sufficiently "serviced" (that is, the repayments had all been made in full and on time). However, a closer look at the accounts showed that the only reason for this was that the repayments were creating an overdraft on Miss E's current account.

Each time the size of the overdraft became a worry, Miss E had taken out a new loan to clear the overdraft and repay the old loan. She had been sold payment protection insurance with each new loan. This made her situation worse, as the premium added a significant lump sum to the agreed debt. This pattern of borrowing meant that Miss E had ended up with a very large loan and could not reasonably afford the repayments.

We thought it should have been clear to the bank that Miss E was having difficulty affording the loan repayments, since it also held her current account. We took this into account when looking at Miss E's situation. We suggested the bank should write off all the money it had lent to Miss E over and above her original request - including the interest and the insurance premiums. The bank agreed to this, which meant that, in total, the borrowing was reduced by almost £4,000. The loan was now affordable, and Miss E was happy, as it meant she would retain her good credit history.

63/04
bank did not keep to the agreed "repayment holiday" on a graduate loan

Mr C had taken out a graduate loan with his bank while he was training to be a primary school teacher. He had recently finished his course and was planning to spend a year travelling before he started work. He therefore arranged a 12-month "repayment holiday". This meant that he would not have to worry about making loan repayments while he was out of the country.

Unfortunately, the bank ignored the agreement it had made with him and it continued to take the monthly loan repayments from his current account. Mr C only discovered what had happened after he tried to draw money from his current account when abroad and found that the bank had "frozen" the account. It took him almost a week to sort things out, during which time he had no access to any money. And when he returned home a few months later, he discovered that his credit history had been adversely affected.

complaint upheld
The bank readily accepted that it should not have taken the loan repayments from Mr C's current account, and that it was this mistake which had adversely affected his credit history.

Given the circumstances, we thought it would be reasonable for the bank to restore Mr C's loan and current account back to the position they would have been in, if it had not taken the loan repayments in error while he was away. We said it should also remove the adverse credit data.

Mr C had suffered the distress and inconvenience of being left for almost a week without any access to his current account. The situation had been particularly difficult for him because he was abroad and it took so long to sort things out. Because of this, we considered £450 to be an appropriate sum for the bank to pay in compensation. The bank agreed that this was a fair settlement, and Mr C was happy to accept it.

63/05
young customer found herself in difficulty when her financial position changed

Miss M was 20 years old and had recently left college, where she had been studying to become a fitness instructor.

After receiving a marketing letter from a loan company, she took up the company's invitation to apply for a loan of £5,000.

Delighted that her application had been successful, Miss M bought a new car with the money. Within a year, however, she had fallen seriously behind with the repayments.

After receiving several letters from the loan company chasing missing payments, Miss M wrote to the company complaining that it had been in the wrong for lending her the money in the first place. She pointed out that, at the time of her loan application, she had been unemployed and relying on benefits. She had also been expecting a baby.

complaint not upheld
When we looked closely at the information Miss M had given the loan company, we saw that the application form mentioned two incomes - Miss M's benefits and her partner's salary. The form also showed that the car she wished to buy with the money would be used jointly by both her and her partner.

When we questioned Miss M about this, she explained that her relationship had broken down some months after she had taken the loan. It was then that it had become impossible for her to maintain the repayments.

We did not agree with Miss M that her pregnancy and reliance on benefits should have prevented the loan company from lending to her at all. We would consider it unreasonable for a lender to discriminate against a potential customer on those grounds. And on the basis of the information Miss M had provided when applying for the loan, the amount she had been lent should have been easily affordable.

We discussed the position with the loan company and it agreed to write-off the balance of Miss M's loan, in recognition of her difficult situation. We thought that was a very generous offer and put it to Miss M. However, she disagreed and thought she should also have a refund of the loan repayments she had already made. We told her that, in the circumstances, the company's offer to set aside almost half the loan was more than enough, and we did not agree that she should press for any more.

63/06
apprentice inappropriately advised to take a with-profits endowment policy as a means of saving

Mr Y had recently started work as a plumber's apprentice. He was 19 years old and single, with no dependants. He lived with his parents but hoped he might eventually be in a position to buy a flat of his own. He was keen to start saving and visited his bank for advice about this. Mr Y had a relatively low income, no investments or savings plans, and £300 in his current account.

The financial adviser at the bank suggested that Mr Y should start a 10-year with-profits endowment policy, for which he had to pay a premium of £50 per month.

It was several years after he had started paying in to this policy when Mr Y noticed the surrender value of the policy was significantly lower than the premiums that he had contributed. He complained to the bank, saying he had not realised that if he cashed in the plan before the end of the 10 years, it could be worth less that the amount he had paid in. He also queried why he was paying for life cover as he did not think he needed it.

complaint upheld
The illustration that Mr Y had been given at the outset did indicate that the policy could be worth less than the amount paid in, if it was cashed in before the end of its term. This was due in part to the charges associated with the plan and the cost of providing life cover. However, Mr Y told us that the effect of charges and the cost of life cover had not been brought to his attention.

We could not be sure exactly what Mr Y had been told at the time about the details of the policy. However, we were satisfied that he had been financially inexperienced and it was entirely plausible that he had not understood - from the illustration alone - that the policy could be worth less than he had paid in if he cashed it in early.

We noted that Mr Y did not require the life assurance and there was no clear reason why he should have been sold it. We also considered that the policy was too inflexible, given the distinct possibility that his circumstances might change - and that he might need access to his capital at short notice, before the end of the policy term. Mr Y had no definite plans to buy a property. We decided that, if he had been properly advised, he would have been more likely to have saved the money in a high-interest deposit account. We told the firm to put Mr Y back into the position that he would have been in, if he had not received the unsuitable advice.

63/07
commercial motor insurance policy - keys left in the vehicle - whether the policyholder had taken reasonable care

Soon after starting work as a trainee electrician, Mr A bought a second-hand van. When he returned from work each evening, he parked outside the house where he lived with his mother. Even though this was in a residential area with a relatively low crime rate, he was always careful not to leave his tools in the van overnight, but to move them into his mother's garage.

Unfortunately for Mr A, his van was stolen one evening while he was unloading it. There was subsequently some confusion about the exact sequence of events. However, it was generally accepted by both Mr A and the insurer that Mr A had left the keys in the van while he was moving the tools into the garage. While he was in the garage he suddenly heard the van being driven away.

The insurer rejected Mr A's claim for the stolen van, saying he had not complied with the policy condition to "take all precautions to reduce or remove the risk of loss of the insured vehicle".

complaint upheld
In rejecting the claim, the insurer was relying on a "reasonable care" condition in the policy, rather than on a specific exclusion of cover that said the vehicle would not be covered if the keys were left in it.

Our approach in dealing with the complaint closely followed the line taken in the Court of Appeal case of Sofi v Prudential Assurance (1993)( 2 Lloyds Rep.559). The test established in this case is relatively simple - in order to show there was a lack of reasonable care, you must first demonstrate "recklessness". This is generally defined as recognising that a risk exists, but deciding to take it anyway. So we believed that in order to exclude Mr A's cover, the insurer would need to show he had deliberately courted the risk of having his van stolen.

We accept that the recklessness test is subjective, and that some people might consider Mr A's actions to be foolhardy. Mr A told us it had not crossed his mind that he was taking a risk, and we were satisfied that this was the case. He had been fully engaged in unloading the tools and happened to leave the van unattended for longer than he had anticipated. We had no reason to believe that Mr A had acted recklessly and we required the insurer to meet the claim in full, adding interest calculated at our normal rate.

63/08
travel insurance policy - theft of personal possessions from a camper van while travelling

During her gap year, Miss H went travelling across New Zealand. She had been there for three months when a number of her possessions were stolen from her camper van. She had been careful to take out full travel insurance before she left the UK, so she was very surprised when her claim was refused.

The insurer told her there was an exclusion in her policy that said claims for theft of property would only be covered if the stolen items had been kept in "locked accommodation" or in "a locked and covered luggage compartment/boot of a motor vehicle".

Miss H challenged the insurer's decision. She said her camper van was her accommodation - and as it had been locked at the time of the theft, she should be covered by the policy. She also said that the insurer was treating her unfairly because camper vans do not have separate, lockable luggage areas.

After the dispute had been referred to us, Miss H told us that she had kept the possessions in question in nine padlocked storage boxes in the back of the camper van. This was a significant departure from her original statement on the claim form, where she had said the items had been "all over the place". It also differed from another statement she had made, in which she had said that she kept the items in a box under the bed in the van.

complaint not upheld
We accepted that Miss H had been sleeping in the camper van and that it was partly designed for this purpose. But we had to consider whether it could reasonably be classified as "accommodation". We concluded that the most reasonable and appropriate definition of a camper van was as a "motor vehicle" - and this would apply over and above any other definition.

In this situation, we were satisfied that the accommodation exclusion applied, so her possessions should have been placed in a locked boot or locked and covered luggage compartment in order to comply with the policy.

In our view, securing the items out of sight within the camper van could possibly be enough to satisfy a valid claim. However, when the claim had first been presented to us, Miss H said that the items had been "all over the place..." within the camper van. Although she later changed her story, we thought it reasonable to conclude that the first report was the most believable. We concluded that, in the circumstances, it was fair and reasonable for the insurer not to accept the claim.

63/09
motor insurance policy - daughter was "named driver" on parents' car

Mr J and his wife bought a second family car soon after their daughter passed her driving test. He arranged the car insurance over the phone and - as is standard practice for many insurers - the call was recorded.

When asked if he was the "owner and keeper" of the vehicle, Mr J said that he was. He also confirmed that he was the principal driver of the car. The insurer then pointed out that Mr J was the principal driver of another vehicle it insured. Mr J said he had been mistaken and that it was his wife who would be the principal driver of the new car. He asked to add his daughter to the policy as a "named driver".

While driving the new car a couple of months later, Mr J's daughter had a minor road traffic accident, which meant that the car needed some small repairs. Mr J submitted a claim to his insurer but it was rejected because the insurer believed this was an instance of "fronting". In other words, it thought the car had been insured in the name of an experienced driver - Mr J's wife - because it would be too expensive to insure in the name of the real principal driver - his daughter.

The insurer reached this conclusion after Miss J had given the insurer a statement in which she said, "It's insured in mum's name I think. Dad did it because it was too expensive to have me named as the main driver..."

Mr J did not dispute that his daughter had made this statement. The insurer therefore "avoided" the policy (treated it as if it had never existed) and declined to deal with the claim. Mr J then referred the matter to us.

complaint not upheld
We considered this to be a prime example of "fronting". Mr J had misrepresented the risk when he took out the policy - as his daughter later confirmed.

As the information on which the insurer had agreed to provide the policy was incorrect, the insurer was entitled to "avoid" the policy from the beginning - and to decline to pay any benefit that would otherwise have been due under the policy.

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ombudsman news issue 63 [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.