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Exit pursued by regulator

Fees Nicola York reports on the FSA threatening lenders with legal action in a row over shock rises in exit fees

The FSA has threatened lenders with legal action if they refuse to comply with its crackdown on fees. Spokesman Robin Gordon Walker says: “If we cannot persuade lenders, then we have to get an injunction and we will have to go to court. The negotiations are quite detailed and both sides are putting their points across with real vigour and it is getting quite legalistic.”

The Council of Mortgage Lenders agrees that lenders need to justify fee rises and says the client has recourse to the FSA and the Financial Ombudsman Service if they feel the charges are too high.

Brokers are up in arms about lenders raising exit fees for borrowers during the contract term.

Some lenders’ contracts contain caveats reserving the right to raise redemption fees in line with market rates. But some brokers believe these are not clear enough and that some lenders are playing follow my leader with fee rise.

London & Country head of communications David Hollingworth says lenders have always had the option of increasing fees during a contract but it has never been a widespread practice until recently, with fees rising dramatically in some cases.

He says: “If it was only a case of raising the fees by 5 or 10 then that would be OK but these fees have rocketed, it is not just a case of lenders gradually edging them up.”

He says there is a question over whether these fee rises are justified by the amount of work required to process the mortgage at the end of the product term.

Hollingworth says lenders raising exit fees could be seen as a way of deterring a client from remortgaging to another deal and also as a way of clawing back some money if the client does decide to remortgage.

But he thinks it is unlikely that lenders will be able to push fees up much further due to the negative coverage they have had.

However, he believes that lenders will continue to defend their right to change the fee during a contract – a point which the FSA says lenders have been extremely vocal in defending.

CBK mortgage adviser Peter Wright says he is horrified to hear that lenders are doing this and says it goes against the principles of treating customers fairly.

He says: “The FSA lays down a key facts illustration which is our bible. This makes a mockery of the KFI because what is there to stop lenders increasing their exit fees to whatever they like? How many other brokers and consumers do not know this? I would suspect there are quite a few.”

Mortgage Force managing director Rob Clifford says he would not be surprised if many brokers were unaware of this practice and thinks it is important they should know that exit fees can be raised because it is another factor that should be taken into account by brokers when assessing which lender is right for their client.

Clifford says: “It might reasonably result in consumers and brokers deselecting lenders that have raised their charges significantly in the past.”

He does not believe it is necessarily a breach of TCF but says the FSA should have the power to regulate exit fees.

Clifford adds: “The difficulty is that TCF can be regarded as something which has an impact on everything that a broker or lender does. It can almost be an additional tier of back-door regulation. I think it has got to be left to product providers to design the products.”

Alliance & Leicester head of intermediary mortgages Mehrdad Yousefi says the FSA needs to talk to lenders to find a solution. He says: “The threat of legal action by the FSA is not going to be seen as a positive step by the lending industry. There is more talking to be done here.”

A&L has not raised its exit fees since August 2004 but has the highest fee on the market at 295. Data from Moneyfacts shows that Woolwich is not far behind at 275 while Northern Rock charges 250.

Lenders such as Standard Life Bank and Intelligent Finance have gone from charging no exit fees five years ago to charging 185 and 175 respectively.

Yousefi says: “I think the lending industry will be happy to listen to what the FSA has to say. The whole debate is over whether the fees are fair in the context of TCF and whether they are transparent. We will be happy to work with the FSA on this.

“Emotion can sometimes overrule logic. Lending institutions are commercial organisations so they have to make a return and it is not in the interests of the industry for lenders to say we will never raise our fees.”


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