The Financial Ombudsman Service's ruling that Halifax should have made its lowest rate available to existing borrowers could result in some of the biggest lenders facing huge compensation claims.
In a decision that the ombudsman admits is likely to have far-reaching implications for lenders with dual-pricing policies, Halifax will have to compensate a borrower it banned from switching to its lower variable rate reserved for new customers.
The ruling, currently awaiting final approval, could leave major lenders such as Nationwide, Abbey National and HSBC open to thousands of claims from borrowers angry at being treated as second-class citizens.
The FOS is so concerned at the potential consequences that it says it may publish guidance to lenders to help them deal with the flood of complaints they are likely to receive, suggesting it is highly unlikely to reverse its initial ruling.
But the lenders themselves are putting up a brave – and unusually united – front, claiming there will be no U-turns as they believe their policies are right for the majority of borrowers.
Halifax, which fears compensation costs could run into tens of millions, is fiercely contesting the ruling and remains defiant over its strategy, claiming it holds the moral high ground.
Press office manager Mark Hemingway says: “We firmly believe we are right and acting in the best interests of our customers. We have absolutely no intention of changing our policy because as far as we are concerned the ombud-sman's decision was the wrong one.”
But Halifax has no right of appeal if the case is upheld, which could leave it struggling under compensation claims from borrowers with capped-rate loans linked to its higher variable rate.
But its situation could deteriorate even further. Altho-ugh the ombudsman's ruling relates to a single borrower with a capped-rate loan, the case could set a precedent for Halifax's discount-rate customers as well, due to the similarity in the terms and con- ditions of both mortgages.
London & Country mortgage specialist David Hollingworth says: “The ombudsman's decision has really come down to the wording on the mortgage offer. If all Halifax's documentation on these loans stipulates the same condition – that borrowers only have to pay its base interest rate – then it could have serious problems.”
While the ramifications for Halifax are obvious, the implications of the FOS's ruling on other lenders with similar strategies are less clear cut. Nationwide has a dual variable rate policy similar to Halifax but, unlike the UK's biggest lender, automatically switched all its existing borrowers to the lower rate upon its introduction.
While the society claims this move shields it from the impact of the ombudsman's ruling, it has a similar case of its own currently being considered by the FOS. Until the outcome of that is known, Nationwide's position remains unclear, but as Hollingworth points out, the initial ruling against Halifax was made on the basis of unspecific wording on its mortgage documentation, regardless of the number of borrowers who benefited from its policy.
Another mortgage provider ostensibly unconcerned by the ombudsman's decision is HSBC, the first lender to introduce two variable rates. It believes it will emerge largely unscathed when the dust settles from the ruling although it admits it has a faction of borrowers pushing for their loans to be discounted from its lower rate.
Despite this pressure, the bank's media relations manager Rob Skinner says the borrowers are wasting their time. “A small number of our customers want to be discounted off the lower rate but we are not going to let them do that. We think they have done rather well out of our variable-rate policy and we have increased our share of the new mortgage market from 2 per cent to 3.5 per cent since we made the move.”
As for the ombudsman, Skinner says it “ought to be cracking down on unfair practices” rather than forcing lenders to compensate borrowers who continually chance their arm for the best possible deal.
Perhaps unsurprisingly, there is little support among IFAs for this view. Pretty Technical Partnership partner Kim North says the ruling has been coming for a long time and believes lenders only have themselves to blame.
She says: “The implications of this are far-reaching and could end up costing some lenders tens of millions of pounds in compensation. But I have to say they deserve it because they fail to do things as they should be done.
“Some of these firms, Halifax in particular, are great hunters and pull in huge amounts of new business but perform very poorly as farmers, treating their existing borrowers as if they will be there forever. This is yet another black mark against the financial services industry.”
Although Halifax is intent on fighting tooth and nail against the FOS's ruling, it seems unlikely to succeed in reversing a decision that the ombudsman acknowledges will have massive consequences. The ultimate cost to Halifax – and a number of other lenders – could be huge, but it will hinge on the level of compensation the ombudsman deems appropriate in the case currently before it.
Either way, Hollingworth believes Halifax will have to start making automatic compensation payouts to borrowers in this position as it would be fruitless for it to take every claim to the ombudsman with the outcome already assured.
The FOS is shying away from describing its judgment as a test case but, when it is has said it will come to the same decision in dealing with similar claims, many people will interpret it as exactly that.