The importance of reading the small print

SA Banker Vol.102. No.1 2005
Bruce Manuel, Ombudsman for Banking Services

Not every dispute dealt with by the Ombudsman for Banking Services (OBS) ends up being resolved in favour of the bank customer.

Although in recent years the results in this regard have tilted slightly in favour of customers overall, there is less likelihood of the OBS coming to the rescue of customers who seek to be released from the provisions of contractual agreements they have entered into with their banks.

The Ombudsman, Advocate Neville Melville, this week cautioned consumers to read before they sign. "This is particularly true of document associated with suretyship arrangements, credit cards, investment and mortgage bonds. Complaints regarding these areas of banking are a recurring theme in this office," said Melville.

Although the OBS can and does base its decisions on fairness and the standard of good banking practice in appropriate circumstances, it is guided primarily by the law where that is fairly certain.

The general rule in contract law is that a person signing a contract is presumed to know what it contains, and is bound by it. The signature serves as an acknowledgement that the person signing has read through the terms and conditions of the contract and has agreed to abide by them. There are exceptions to the rule, but they seldom apply. It will not usually help a complainant to rely merely on the obligations of a fair contract being very onerous or even unfair.

"Anyone proposing to enter into a contract would be well advised to request a copy of it to study ahead of time," advised Melville. "The banks are obliged by the Code of Banking Practice to use simple language and to explain any legal terms. Customers should resist the "sign here, here and here" approach if it is at all possible, especially when making a major financial commitment.

Under no circumstances should they sign incomplete documents," cautioned Melville. "Causing a delay is better that repenting at leisure."

To illustrate the point, the OBS release summaries of some such cases in which the disputes were resolved in favour of the banks involved:

Surety Contracts
A bank customer signed as surety for her son's personal loan of R26 000 under the impressions that it was only in respect of a limited amount and for the personal loan only. After the son settled the personal loan the bank then held the complainant (the mother) liable for her son's overdrawn cheque account of R5 537,53. The surety agreement clearly stated that it was for any of her son's debts (whether now or in the future) limited to an amount if R26 000. The bank customer was held liable on the surety agreement.
(Lesson: If a bank customer intends to sign a specific debt or amount, he or she should ensure that the debt or amount is specified in the contract, as the agreement will have unlimited application if it is not.)

Terms and conditions of a credit card.
The bank held the member of a close corporation (CC), a bakery, liable for R5 000 outstanding on the CC's credit card. The member denied being responsible as the card was in the CC's name and he could not be held responsible for its debts. The application form for the card was found to have been signed by the complainant and it specifically referred to the terms and conditions of usage of the card. These terms confirmed that he accepted joint and several liability as co-principal debtor for all purchases and withdrawals made with the card. The bank elected to recover the amount of approximately R5 000 spent on the card from the member, as the business had become dormant. The bank customer indicated that he was unaware of the fact that he signed in his personal capacity. It was found that the application as well as the terms and conditions clearly indicated that a member could be held liable personally and the bank customer's claim was repudiated. The bank was, however, required to take a portion of the loss because of its failure to proceed against the CC while it was still operational. The complainant's application for a review of the Ombudsman's determination was turned down by the review panel judge that considered it.
(Lesson: anyone who has signed as surety for a business's debts should ensure that they were released from their obligation by the bank upon the sale of the business. The sales agreement should require that the buyer makes the necessary arrangements with the bank prior to transfer of ownership taking place.)

Mortgage
A bank customer requested that his bond of R500 000 be cancelled and transferred to another bank. The bank charged penalty interest, as the customer had not given the bank 90 days notice in respect of settling his mortgage bond account. The bank claimed that it was entitled to do so as per the terms and conditions of the mortgage agreement. The bank customer claimed that he was not aware of such a clause and therefore should not be held liable in respect of the penalty interest. He further alleged that the bank was taking revenge on him for transferring his account. The bank customer's signature, however, appears on the mortgage agreement and the Ombudsman therefore found that the bank was not wrong in charging penalty interest.
(Lesson: apart from reading the contract, ensure that the bank is requested to do the transfer after the notice period had elapsed.)

Investment contracts.
In numerous cases dealt with by the OBS, bank customers have alleged that the investment broker involved did not disclose fees/charges/commissions up front. Investigations have revealed that the bank customer' signatures appear on the quotes, application forms or contracts and other documents containing specific references to these costs. In these cases, the OBS usually finds in favour of the banks. In one such matter, the complainant alleged that she was never informed of any costs when making her investment of R300 000. She admitted signing some forms but did not read them properly. The bank produced the investment contract, signed by the complainant: it clearly referred to the various fees and charges applicable to the investment. The document clearly expressed all fees as a percentage of the total investment. The complainant was held liable for the fees charged.

Bank customers sometimes alleged that the broker has made specific guarantees concerning investment performance. The customers, however, signed all the relevant investment documents which did not confirm the said guarantees. Generally, if these guarantees are not mentioned in the documents signed by the parties, the Ombudsman will not find in favour of a bank customer.

In one matter a complainant invested R50 000 on the advice of a broker. The complainant alleged that the broker had promised a 15% return on the investment. He trusted the broker and therefore did not request confirmation in writing. Some years later the investment was found to have lost 25% of its value. The investment contract did not refer to any guarantees and the broker denied giving the complainant any guarantee of returns. The bank was not found to be liable for the loss.
(Lesson: Ensure that you read and understand the terms and conditions of the contract you are entering into. By going through the terms and conditions of the contract at the end of the investment term may prove to be too late. You as the investor have the right to safeguard you income by asking for more information and seeking clarity before you sign any documents.)