Bank right to not act on instruction when customers said they would switch to another bank

Categories:

Service problems, Advice & information, Instructions not followed, Lending,

Summary:

In June 2024, the directors of a partnership contacted the bank to discuss a plan to change the structure of the partnership. The change would require increasing the partnership’s loan and switching from a fixed to variable interest rate. The directors asked what the early repayment adjustment fee would be for such a switch and what variable interest rates were available. The bank said there would be only a $10 administration fee and no early repayment adjustment fee.

Published:

July 2025

On 17 June, the bank met the directors and told them they could save $14,000 a year by switching from a fixed to variable interest rate. The directors told the bank to switch the loan to variable, and shortly afterwards instructed the bank to proceed with the variable rate. At another meeting on 25 June, they discussed a variable rate of 7.05 per cent. Later that day, the directors wrote to the bank instructing it to proceed with that rate. But the bank came back the same day saying this rate was no longer available. The directors decided to refinance with another bank where they could get a better rate. In August, they refinanced with another bank, and their first bank charged them an early repayment adjustment fee of $14,982.

The directors complained that the bank misled them into believing there would be no such fee, and they therefore relied on incorrect information when they broke the loan. They also complained that the bank failed to follow their instructions in June when they told it to switch the loan to a variable interest rate. They said they believed the loan was on a variable rate from 25 June 2024 onwards, including when they refinanced with another bank, and they said they would not have had to pay the fee if the bank had switched the loan as instructed.

Our investigation

We calculated that the fee would have been $50 on 11 June – in line with the bank’s quote of no cost. However, the bank should have made clear, as a matter of best practice, that this quote was valid for a limited time only and subject to change – although the failure to provide this disclaimer did not amount to misleading conduct. One of the directors, the partnership’s chief financial officer, was astute in financial matters and should have known that the fee was linked to wholesale interest rates, which could change at any time. It was unreasonable to assume the bank’s quote of no fee would remain valid for two months – through to August.

As for the directors’ argument that the bank failed to follow their instructions to break the loan, the bank replied to their 25 June email instructing it to proceed with the 7.05 per cent rate, saying this rate was no longer available – to which the directors responded that they would go to another bank. It was reasonable for the bank to assume, then, that the directors’ response, that they would take their business elsewhere, rescinded this instruction.

We found instances where the bank’s communication was less than clear and effective, particularly its failure to make explicit on 11 June that the fee quote was valid for a certain time only and subject to change. The bank also appeared to give conflicting information about interest rates and the bank’s ability to match competitors' rates. The bank offered $2,000 compensation in recognition of the stress and inconvenience caused by its poor communication.