In August last year, Ombudsman Emma Peters decided that the service was only able to investigate a complaint regarding a borrower’s mortgage interest rate with the bank’s subsidiary Mortgage Agency Number Five (MAS5) from 31 October 2012.
However, Peters also decided that the service would also review when the borrower’s mortgage reverted onto the lender’s standard variable rate (SVR), which was in January 2009.
The Co-op claimed this was an error in law and went beyond the Ombudsman’s jurisdiction.
The borrower took out an interest-only mortgage with MAS5’s predecessor GMAC-FRC in 2006 at a rate of 5.64 per cent. This was set to revert to an SVR of 6.74 per cent in January 2009, as stated in the borrower’s offer letter. It was noted that the variable rate was subject to change.
Her mortgage was sold and transferred to MAS5 in June 2007 and in 2009, moved on to MAS5’s SVR which was 4.99 per cent until 13 January 2009. This then fell to 3.99 per cent until 24 February of the same year, then fell further to 3.49 per cent until 17 March.
It dropped again to 2.99 per cent until 1 July 2009 before rising to 3.74 per cent until 1 October of the same year.
It went up two more times to 4.5 per cent and 5.25 per cent before it rose to 5.75 per cent on 1 May 2012 to 1 September 2016.
The borrower said she was left unable to pay the capital of the mortgage, despite having paid off the interest as the value of the property had fallen below the amount borrowed, putting her in negative equity. She says she is unable to remortgage onto a favourable rate and therefore considers herself “trapped” in the mortgage.
The Ombudsman said that as the borrower complained about each rate increase being excessive, each charge is considered a separate act by MAS5 and therefore a separate event.
As a result, it will look at the rate rises before 2012 as “events” for context rather than complaints.
Mr Justice Griffiths concluded: “The Ombudsman accepts that no complaint can be made about charges made before 31 October 2012. It is in my judgment wrong to say that it is unreasonable, or otherwise unlawful, for her to consider, when deciding ‘what is, in [her] opinion…, fair and reasonable in all the circumstances of the case’ that the prevailing rate itself should be examined, from the outset, and also that the prior history should investigated to see what impact, if any, it had on the rates applied on and after 31 October 2012.
“As the Ombudsman herself puts it in her final decision, ‘In considering the fairness of those interest charges from 31 October 2012, we will need to look at the impact of what may or may not have contributed to those charges – including contributing factors that may have happened before the last six years’.”
Griffiths added: “The relevance of the rate prevailing and charged on and after 31 October 2012 is obvious. It is a little harder to see what assistance the Ombudsman will gain from looking at the rate setting as far back as 2008, but what she makes of that remains to be seen.
“I do not suggest that she will, or should; nor do I limit her room for manoeuvre. All I have to decide is whether the course she proposes in her final decision, including those passages affirmed and repeated from her provisional decision, as explained in her witness statement, demonstrate an irrational, unlawful or otherwise judicially reviewable error. I have concluded that they do not.
“The application for judicial review is, therefore, dismissed.”
The Co-op’s response
A spokesperson for The Co-op said: “MAS5’s claim for judicial review was not about the underlying complaint itself but a challenge to the FOS’s jurisdiction and to the interpretation of the time-barring rules set out in the Financial Conduct Authority Dispute Resolution handbook.
“The decision impacts the general principle of how time-barring is construed by the FOS and applied to complaints more generally and within the wider industry. It is disappointing that MAS5’s application for judicial review has been dismissed.”
The spokesperson added that the bank would continue to work with the FOS as it reviews the merits of the underlying complaint and the bank maintains that “historical variations made to the customer’s mortgage account were applied fairly and in accordance with the terms and conditions of the mortgage contract”.
“In a Financial Ombudsman case from 2014 (Ref: DRN3507504), we received a decision in which the FOS concluded that it was satisfied that we had not acted unfairly and that historical increases to the MAS5 SVR had been applied in accordance with the mortgage terms and conditions,” the spokesperson noted.
MP tells Co-op to redress borrowers
An All Party Parliamentary Group (APPG) on Mortgage Prisoners has asked The Co-op to pay redress to customers of MAS5.
In relation to SVR rises in 2009, an FOS investigator previously found that MAS5 “had not provided any evidence to show that the costs of funds it used in its business increased”. In relation to the 2011 and 2012 SVR increases “[MAS5] hasn’t provided anything that relates specifically to MAS5’s own costs, or how these might have changed.”
Seema Malhotra MP, co-chair of the APPG on Mortgage Prisoners said: “Now that the Co-operative Bank has lost its judicial review, it must start living up to its ethical values and pay redress to the customers who have overpaid due to its misconduct.
“These unfair increases have had a devastating impact on customers.”