New guidance published last week ended months of investigations into the practice of increasing the charge above the charge that a customer originally signed up for.
It means that it is unlikely lenders will be able to push up their fees in such cases.
The news has been welcomed by brokers as it will make it easier to compare products for customers, given the added certainty.
The regulator has given mortgage lenders four options and they have to notify the FSA by February 28 on which one they will adopt.
The options are:
– Charge no exit fee.
– Charge the original fee.
– Charge a revised fee.
– Charge their current increased fee, which has since been increased from the original contract.
The FSA will require lenders that opt for the third or fourth option to justify their reasons for increasing that charge.
Compliance consultant Adam Samuel says: “The mortgage industry’s discretionary approach has been illegal since 1995. The Unfair Contract Terms in Consumer Contracts Regulations, which are based on a directive that came into force in 1995, prevent people dealing with consumers from creating terms which the company can change at its own discretion where the customer cannot respond by cancelling.
“Any contracts entered into after that date are affected and firms cannot impose a charge on a purely discretionary basis in relation to a mortgage entered into after January 1995.”
Alliance & Leicester, which charges the highest fee in the market of 295, revealed within two hours of the statement, that it will no longer bill customers for more than they have signed up for.
Borrowers that took out a mortgage after August 2004 will continue to pay the 295 exit fee as stated in their contract, but those that signed up before that date will no longer be forced to pay the increased fee of 295 and will revert to the original 195 agreed.
Alliance & Leicester says: “A&L endorses the approach that the FSA is taking. We have been reviewing our policy and have decided to extend our approach of offering certainty to all mortgage customers.”
John Charcol senior technical director Ray Boulger says: “It will now be easier to make a robust comparison of different mortgages as the only significant unknown fee is the exit fee. In future, this fee will either have to be fixed at the outset or the basis on which it can be varied will be known.
“The report addresses all the concerns we have raised on many occasions over the last few years and many past and present mortgage borrowers will benefit as a result.”
The Mortgage Practitioner sole trader Danny Lovey says: “I think the FSA has done a good job on this and has not bottled out. If lenders have any sense they will be grateful that the FSA is allowing them to make their own decisions as long as they are treating customers fairly. If they have any sense, they will choose options one, two or three and stop doing what they are currently doing which is option four.”
The FSA’s new orders come after it questioned in June whether lenders that raise their fee during the contract term are doing so unfairly. The lending community was given a month to justify its reasons for the practice.
Despite complaints about the high levels of exit fees, this investigation was only about the changing of a fee and not the price, as that falls outside of the FSA’s remit.
Managing director of retail markets, Clive Briault, says: “We expect these measures will stop borrowers from being surprised by unexpected increases in these fees. People will know when they sign up for a mortgage what fee they will pay on exit or should be given a clear idea of how the fee might be increased fairly.”
Any new lenders entering the market after February 28 will have to submit their charging structure as well, while the rule also applies to those that decide further down the line to increase their charges within a customer’s contract period.
As revealed in Money Marketing last week, the Council of Mortgage Lenders was involved in the FSA’s latest statement.
Most commentators agree that the fee move is a crackdown that will hit lenders’ balance sheets.
That view is demonstrated by the fact that the regulator expects that any borrower who has paid a higher exit fee while other customers from the same lender are charged the original fee, should be refunded the difference.
Nevertheless, the CML is happy with the outcome of the investigation. Director-general Michael Coogan says: “We welcome the FSA statement as a practical way forward. Transparency in fees and charges is unequivocally a good thing in terms of ensuring that consumers understand what they will need to pay at various stages.
“Lenders will ensure that, in future, their exit fees and the terms on which they may be varied, are clear to borrowers up front. But in the UK market, where competition is tight and price competition is already fierce, the effect is unlikely to have a dramatic impact on the overall cost of a mortgage.”