A bank does not have the right to call up your surety without informing you that it intends to do so, and the bank cannot call up a surety prematurely.
In two cases dealt with by Neville Melville, the Banking Adjudicator, recently, banks had to make good to consumers for jumping the gun
with sureties.
In one case, Mr X applied for a personal loan with the bank. The loan was approved and he ceded an insurance policy as security for the loan.
He paid the instalments on the loan by debit order, but after he lost his bank card he started paying the instalments directly into the loan account.
He had undertaken to repay the loan by the end of July 1999.
Mr X received a letter from the insurance company dated July 20, 1999, informing him that his policy had been surrendered.
When he made enquiries, he was told by the bank that the policy had been surrendered to settle the outstanding loan at the bank. The bank said that the balance of the policy had been paid into Mr X's bank account.
At first the bank insisted that it had informed Mr X, by registered post, that his security was going to be called up, but later admitted to having surrendered the policy due to a clerical error in its office.
This was discovered by the Banking Adjudicator through a letter from the bank to the insurance company, requesting that the policy be re-instated. So, in essence, the bank had admitted liability three months after the complaint was received by the adjudicator's office.
The insurance company agreed to re-instate the policy if it received the initial surrender value on the policy, an administration fee, the outstanding premiums and a penalty fee.
Melville has recommended that the bank make the necessary payments to re-instate the insurance policy, and the bank has agreed to do so.
In another case, Mr Y signed surety for a close corporation (CC), together with two other members of the CC. The CC had a cheque account with an overdraft facility.
The CC exceeded the approved limit of the overdraft. The members of the CC discussed with the bank measures to bring the overdraft within the approved limit. The bank did not institute legal action, or issue a letter of demand.
Then Mr Y was diagnosed with a serious illness. He applied for, and received, a payout under the dread disease cover of his insurance policy. On the day that he suffered a seizure and was admitted to hospital, the cover on the policy was paid out into his personal bank account, held at the same bank.
The bank claimed it received instructions from Mr Y to pay off the CC's overdraft using his funds, and that this was followed up by a written instruction from one of the other members of the CC.
Mr Y denied phoning the bank or issuing the written instruction to the bank to pay off the overdraft from money in his personal account. He presented evidence that showed that he was not medically fit at the time to make any rational decisions.
The bank conceded that the signature on the instructions did not match the specimen signature that they held, but claimed that they did receive a second phone call from Mr Y confirming the instruction.
On a balance of probabilities, Mr Y could indeed not have been in a condition to make the calls to confirm the written instruction to the bank, Melville says.
He also concluded that the bank did not follow proper banking practice by deviating from normal procedure for a transfer of this kind.
The bank had also gone ahead with the transfer, despite the mismatch of the signatures.
Melville recommended that the bank refund the amount it took from Mr Y's account, together with interest he would have earned.
- The banks have not been identified because they agreed to abide by the recommendations of the adjudicator. Melville wishes to keep as sanction the right to publish the names of the banks and their transgressions in cases where the banks refuse to accept his recommendations.
The Banking Adjudicator does not have statutory powers, and cannot force banks to comply with his rulings or recommendations.
The banks have agreed contractually to abide by the adjudicator's rulings. If they don't they can be sued for breach of contract.
Tips
- Make sure you understand what it means to stand surety for a debt ;
- Make sure you are know how much of the debt you can be asked to repay. In other words, are you promising to pay a debt of a set amount, or is the amount open-ended;
- Limit your surety to a particular debt. Banks have been known to call up sureties years later for a completely unrelated debt. For instance, you could have signed surety for a child's student loan, only to have a bank call in the surety for a business debt incurred by the now grown child many years down the line;
- Limit your suretyship to a particular amount. Specify the amount, if known. Where the amount can fluctuate, such as in the case of an overdraft, specify the maximum amount for which you are prepared to be liable; and
- Insist on retrieving your policies, and check that the cession is cancelled, once the debt is settled.
Definitions
- Suretyship: an agreement to meet another's debt if they default.
- Security: the provision of something of value that the creditor can convert to cash if the person owing doesn't pay.