The Office of Fair Trading (OFT) has stated that the unrestricted rights of lenders to vary interest rates at will for those who are locked into loans is unacceptable and has issued guidelines on how the Unfair Terms in Consumer Contracts Regulations 1999 apply to interest variation terms.
Commenting on the announcement, John Bridgeman director-general of the OFT, said: “It is unacceptable for banks and building societies to vary interest rates uncompetitively for savers and borrowers that are locked into accounts.”
Under the new guidelines, the OFT has stated that unrestricted interest variation terms are not acceptable where there is a requirement to pay an early repayment charge. Rate variations will only be permissible if they are linked to an external rate outside the control of the lender.
Bridgeman said that this was particularly relevant to borrowers in the sub-prime market.
“Non-status borrowers are particularly vulnerable to interest rates that go up but do not come down, especially when they are combined with unaffordable exit charges. Many of these people are not in a position to shop around for better deals because they have poor credit ratings.”
However, Ray Boulger, technical director at John Charcol, says that while this move addresses the issues of future borrowers, it does not help people currently locked into loans.
He said: “Because the OFT requirements apply from now on, there is no requirement for lenders to pull down rates that are stuck at a high level.”
He added that problems could arise if rates were to fall again.
“When the bank base rate fell from 5.5% to 5%, most lenders only reduced the SVR from 6.99% to 6.89%. It would appear from the OFT that when they fall again, any borrower with a lock-in will have to be given the full benefit of cuts even if the SVR does not drop for other customers.”
This, he said, would essentially introduce a two-tier rating system that would inevitably cause controversy.
However, Sue Anderson, external affairs manager for the CML, says that this issue has, to a certain extent, been overemphasised as most lenders do not practice like this. She said: “All these guidelines do is clarify the view of the OFT.”
Most sub-prime lenders set their rates at a percentage over Libor and, as a result, control rates with an external index. Others such as igroup link it to a major lender’s SVR.
Jonathan Sadler, associate director of sales and marketing for the lender, says: “We link our SVR to NatWest which mirrors bank base rate. From 3 April, all loans will be linked to Barclay’s base rate.”
igroup uses this mechanism as it does not think Libor is fair.
“Libor is not transparent to consumers. It is designed as a mechanism for banks to direct transactions and for a consumer it is hard to understand what this is,” says Sadler.
Bristol & West uses its own SVR, but on all its mortgages it has a commitment that this will never rise more than 2.5% over bank base rate.