Why was dual pricing introduced and which lenders adopted this approach?
HSBC was the first lender to introduce dual pricing in September 2000. It was followed in February 2001 by Halifax and Nationwide. With two of the top five lenders adopting this approach many others began to assess whether they should respond. They did so in different ways. Some introduced extra variable rates, some made their new business rates available to existing borrowers while others did nothing.
Abbey National adopted the approach of introducing two tracker rates, both with a guaranteed margin over bank base rate until 31 December 2002, and some people are taking the view that this means Abbey has three standard variable rates (SVRs). But Abbey’s tracker rates are sufficiently different to their traditional SVR to avoid being classed as SVRs. Its SVR is a managed rate whereas the trackers are linked to the bank base rate for a reasonable length of time.
However, the Ombudsman took a different view on its initial ruling and where Abbey National has probably gone wrong is in the pricing of its discounts off the tracker rates. Had it simply introduced these tracker rates as one option for customers and priced its new business discounts directly from bank base rate, it would probably be in a stronger position ‘ instead of lifestyle tracker rate -1.05%, it should have had bank base rate -0.05%.
Cheltenham & Gloucester (C&G) introduced two new rates, one for daily interest and one for annual. However, it withdrew these lower rates in September 2001, after the Ombudsman’s initial ruling and hence they were only available for four and a half months. If the Ombudsman does rule against C&G, its borrowers will only be able to claim four and a half months’ compensation so it is a less serious problem for the lender.
Lenders claimed they introduced these rates to make mortgage pricing fairer for existing customers. However, there were other ways they could have done this, such as having a loyalty rate, which would not have caused these problems.
What is the current state of play
and which lenders are offering compensation?
Both Halifax and HSBC initially took a similar stance over compensation for dual pricing. They both said they would look at each case individually, rather than accept the Ombudsman’s ruling as a test case and automatically compensate everyone. However, Halifax subsequently did a partial U-turn and announced it would compensate everyone who had complained by 31 December 2002. HSBC has taken an extreme stance by continuing to operate a dual SVR policy even after the Ombudsman ruled it was unfair. Halifax has now dispensed with the lower rate for new business, although it has retained it for those customers who, since February, bought a discount mortgage priced off the lower SVR.
Nationwide has also dispensed with one of its SVRs, in its case the higher one, and is compensating all adversely affected borrowers automatically. Abbey National lost its case with the Ombudsman but has appealed. A decision is still awaited on Cheltenham & Gloucester.
Which clients are eligible for compensation?
All HSBC customers on a discount rate since 1 September 2000 are eligible for compensation. Nationwide will automatically compensate all borrowers on a discount or capped rate from March 2001. This will be done by 1 June and the lender will write to all customers.
Halifax customers who may qualify are those with discounted or capped products since March 2001 which linked to the old standard variable rate. However, the latest ruling from the Ombudsman appears to confirm that compensation is only due from the point that people complained. This also raises the question of when they complained. Is it when they first telephoned, when they wrote or when they had a meeting with Halifax? In addition, this suggests that those who did not complain prior to Halifax withdrawing its lower SVR for new business will not qualify. Nevertheless, the Ombudsman has stressed that borrowers can still appeal if they are dissatisfied with Halifax’s treatment of their complaint.
Abbey National is currently awaiting ruling from the Ombudsman. It lost its original case but has appealed. A decision from the Ombudsman is also due with respect to Cheltenham & Gloucester.
What advice should advisers be giving to borrowers stuck on higher SVRs?
Anyone stuck on an SVR with no redemption penalties is throwing money away every month. With interest rates at a 40-year low, it is now time to remortgage. Some great fixed rates that were available are no longer about, but there are still good mortgages to be had. We recently carried out some research that found that over half of mortgage borrowers are still on SVRs. If you turn this into an actual monetary figure of how much borrowers are wasting each month it is frightening.
What does the Financial Ombudsman decision mean for the mortgage market as a whole?
The lenders will probably take a hit on the compensation and this will no doubt lead them to be more careful over their definitions in future. As for now, they will have to remain competitive, or accept a reduction in business.
David Bitner is senior technical manager at The Marketplace