MPs fear UK banks will copy BoI’s tracker rate increase

British MPs have demanded assurances from the British financial regulator that other banks will not try to copy Bank of Ireland’s decision last month sharply to increase tracker mortgage rates for thousands of home-owners.

Nearly 14,000 mortgage-holders in Britain were told tracker rates – which are supposed to be linked to the Bank of England’s base rate – were doubling, or trebling in some cases, even though the base rate has not moved.

Defending itself at the time, Bank of Ireland said higher costs are justified because funding such mortgages has increased significantly since 2008, while clauses in the original contracts provide for changes if "special conditions" occur.

Earlier this month, the chairman of the House of Commons Treasury Select Committee, Andrew Tyrie, wrote to the head of the UK Financial Services Authority, demanding to know what it had done to investigate Bank of Ireland's conduct.

In a reply, the FSA's chief executive, Martin Wheatley, said the residential mortgages were taken out before the FSA began to regulate them in October 2004, while the buy-to-let morgages are not subject to FSA regulation.

Unfair regulations

The effect of this, he said, is that the FSA’s rules “do not apply” in this case, though a bank’s general conduct would still be of ‘some relevance’, while it would also be subject to unfair contract regulations.

“The FSA engaged with the firm prior to the change being announced to impress upon its senior management the need to ensure fair customer outcomes and we will continue to do in respect of their dealings with customers,” wrote Mr Wheatley.

Following an examination of the contracts, the FSA chief said the authority had not identified “any concerns” about the terms of the original contracts – a relevant issue since customers say that they were never warned when they took out the mortgages.

Bank of Ireland UK, he said, had volunteered to exclude customers from this change where there is evidence suggesting that the customer could have been led to believe the differential was for the “life”, or “lifetime” of the product.

“The Bank of Ireland UK has also excluded all customers whose mortgage offers did not include the condition that the firm has used to justify this increase,” Mr Wheatley told Mr Tyrie by letter.

Most of the mortgages are 10 years old, with a low loan-to-value, while “affected borrowers can remortgage to another lender without paying early repayment charges, including any charges that might apply to connected extra borrowing”.

However, he was unable to say if other lenders had similar “special condition” terms in their mortgage contracts, saying that he “could not give an industry-wide answer to this question”.

Unhappy customers

Unhappy customers can complain to the bank and “if they are not satisfied by the response they receive, they may be able to refer their complaint to the Financial Ombudsman Service for a decision”.

In reply, Mr Tyrie complained that Mr Wheatley’s response “fell short”, saying that the FSA had failed to make clear whether it was concerned by Bank of Ireland’s action, particularly if it is copied by other lenders.

“We need more information to be confident that the regulator has thought carefully about this issue. It must exercise judgment to ensure that customers are being treated fairly. Mr Wheatley’s letter appears to fall short on both counts,” said Mr Tyrie, in a statement.

Noting Mr Wheatley’s declaration that he could not say whether similar clauses are included in other lenders’ mortgage agreements, Mr Tyrie questioned whether the FSA would allow other lenders to include such clauses in future.

“If so, do you intend to ensure that in future such clauses are specifically explained to customers,” said the Conservative MP, who heads one of the House of Commons’ most influential parliamentary committees.

Bank of Ireland’s UK residential mortgage customers will see their rates jump to 4.49 per cent based on the current Bank of England rate. From May 1st, the rate will be the BoE rate plus 2.49 per cent, while in October it will rise to the BoE rate, plus 3.99 per cent.