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Mortgages (Regulation)

1 pm

Mr. Barry Gardiner (Brent, North): The capacity of Members of Parliament for self-delusion is considerable and widely remarked on by press and public. We are infinitely capable of taking credit for a rise in consumer spending as much as a drop in inflation, or for the building of a new road as much as a reduction in carbon monoxide emissions, and we will do it without blushing. We are oblivious to the fact that some of the things that we claim to have championed would have happened anyway, and we are positively dismissive of anyone who dares to suggest that the events of which we claim to be the sole and proximate cause are in any way mutually contradictory.

When it comes to delusions of grandeur and self-importance, my own talents are no less than those of my parliamentary colleagues, but even I hesitate to claim that it was my visit to the Speaker's Office on 14 February to secure today's debate on mortgage regulation that set in motion the extraordinary events in the mortgage industry over the past three weeks. The debate was originally entitled "Standard Variable Rates in Mortgages", but that was amended to the more prosaic "Mortgages Regulation" under pressure from the Table Office. I would dearly like to think that it was a leak of Sixsmith proportions about the original title that prompted the Nationwide building society to announce nine days later that it would abolish its higher standard variable rate and compensate its customers. In a similar vein, I trust that the Economic Secretary to the Treasury will be pleased to confirm this afternoon that it was the bleak prospect of responding to this debate that prompted her to rush to press the long-awaited Treasury consultation document "Regulating Mortgages".

After chalking up two such clear evidences of the power of the Adjournment Debate to initiate pre-emptive action, who could doubt that yesterday's announcement by the Halifax about compensation to some of its standard variable rate customers is also a direct consequence of its fear of oratory in the House of Commons? In truth, I doubt it, but in my defence, I am yet young in the House. Given a few more years by the electorate and under the tutelage of my senior colleagues, I will probably arrive at that happy state wherein all good things can uniquely be attributed to my initiative.

So said Philip Williamson, the head of Nationwide building society, commenting on his company's decision to abolish its higher standard variable rate and actively seek out and compensate customers who had suffered by having their mortgages pegged to it since 1 March 2001. With such a talent for self-delusion, Mr. Williamson is eminently suitable for the House of Commons. The only reason why Nationwide is now doing the right thing is that on 1 March 2001 it did the wrong thing. The Minister will be pleased to hear that I will not catalogue the details of cases on which the Financial Ombudsman Service has made a ruling on dual variable mortgage rates since the beginning of this year. I will, however, clearly outline the common elements of those cases and why I believe that the mortgage lenders acted wrongly.

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In each case, the borrowers had taken out their mortgage at a time when the lender had only one standard variable rate. The lender in each case promised borrowers a special deal of a discounted or capped-rate mortgage that would use the SVR—standard variable rate—as its reference point. The lender in each case introduced an additional variable rate and claimed that the reference point for the deal was the higher of the two variable rates. Each lender tried to dress up its new rate in a different name. Halifax had "Halifax variable rate 2" and Nationwide had the "base mortgage rate".

The ombudsmen rightly ruled that in each case the new, lower rate was fulfilling the function of the standard variable rate that the parties had agreed would be the yardstick for their contract. Any reasonable borrower wishing to take out a discounted or capped mortgage would have been entitled to take comfort from the fact that the standard variable rate would respond to the Bank of England base rate in such a way as to attract new borrowers or to retain existing ones. However, the Halifax variable rate 2 was 0.75 per cent. lower than Halifax variable rate 1, and Nationwide's base mortgage rate was 0.5 per cent. lower than the so-called standard variable rate. The higher rates were, in effect, used only by customers who the companies could claim were locked into them. New borrowers took the lower rates. The lenders had held out the prospect of real financial benefits against a known standard—the standard variable rate—but that standard proved to be illusory when they introduced the lower rates. In effect, a mammoth fraud was perpetrated on the customers, which is only now being set right, and that reluctantly and partially.

Let no one be under the blissful misapprehension that Nationwide realised its mistake and happily rectified it. It lost the original complaint to the ombudsman last year and appealed against it. Only when it lost that appeal did Nationwide decide to make a virtue of necessity. It contrived to use the decision to turn back the clock and indemnify all the customers that it had so badly wronged as a strategy to rubbish its competitors. Of course, today we can be thankful that it did, because if Nationwide emerges rather badly from the affair, Halifax—or HBOS—has truly earned its dreadful reputation as the villain of the piece, and not just among taxi drivers and market stall owners. Instead of conceding gracefully after losing its appeal, Halifax publicly insisted that each and every person who considered that they had been similarly wronged and disadvantaged would have to lodge a separate case to the financial services ombudsman.

The Minister knows well that Halifax had at least 500,000 people linked to its old standard variable rate. She must ask herself whether everything stands well with the process of mortgages regulation in this country, when mortgage lenders can cock such a snook at their customers, insisting that justice be dispensed only after submitting to the bureaucratic nightmare of 500,000 separate cases to the ombudsman. It is disgraceful that Mr. Ian Beggs, the senior media officer for Halifax, sought to dismiss the ombudsman's report by claiming that it was only

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with customers. That is spin worthy of Jo Moore or Martin Sixsmith, and I hope that it will be dealt with in a similar, if swifter, manner.

Yesterday, Halifax was forced into a partial climbdown. Instead of following Nationwide's lead and indemnifying all its affected customers, Halifax has said that it will compensate only the 10,000 customers who had formally complained between 1 March 2001 and 31 January 2002, when variable rate 2 was imposed and withdrawn respectively. Another 20,000 customers who complained after 31 January will not be compensated but given a £100 ex gratia payment. Those who suffered in silence are to be given nothing. At first, quite shamefully, Halifax put out a statement yesterday saying:

The emphasis, I would stress, is that of the Halifax and not my own. The statement was instantly rebutted by the ombudsman, who stated:

I am confident that Halifax will ultimately be forced to give way and to compensate all its affected customers. That may cost as much as £200 million, which the company is trying to retain for its shareholders, not its policyholders. At this point, it is right that I pay tribute to journalists such as Richard Dyson and the campaign by the financial section of the Daily Mail which, with the Consumers Association, have brought customers as far as they have got today in obtaining redress.

Mr. Gareth R. Thomas (Harrow, West): May I draw my hon. Friend's attention to a parallel case and invite him to ask the Economic Secretary to consider the implications? Higher rates of interest were charged by Paragon Finance on a mortgage book that it took over from National Home Loans in the 1980s. Two sets of National Home Loans borrowers challenged Paragon's higher rates of interest under the Consumer Credit Act 1974 and the Unfair Contract Terms Act 1977. Both arguments were struck down by the Court of Appeal in October, despite considerable sympathy from Lord Justice Dyson, who said:

Mr. Gardiner : I am delighted that my hon. Friend has made that intervention. So much scamming goes on in the mortgage and consumer credit markets that he does his constituents a service in highlighting the problem today. I am sure that the Economic Secretary will be able to investigate the case that he raises.

It is one thing for consumers to fight against mortgage lenders in this country and to have to go through the ombudsman's procedures to secure justice. It is another thing to see the way in which the Building Societies Association has responded to that. Adrian Coles, the director-general of the Building Societies Association, has accused the ombudsman of introducing

He adds:

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If the fact that the ombudsman is calling for justice for millions of people in this country is regulation by the back door, we are left to wonder what regulation by the front door might be. The answer is currently contained in the mortgage code, which is a voluntary code entered into by mortgage lenders. Two of the key promises it contains are:


Anyone who has followed the saga of dual standard variable rates over the past year cannot believe that the mortgage lenders involved have been complying with the mortgage code.

The Economic Secretary is probably as avid a reader as I am of Building Society News, the newsletter of the Building Societies Association. She will therefore have read February's edition. It makes salutary reading, because it contains a major attack on the ombudsman's powers, stating that

That is an extremely sinister development in the regulation of mortgages in this country. The Building Societies Association is, in effect, laying down a marker, saying, "If we don't like the decision of the financial services ombudsman, we may take it to the Human Rights Act 1998." That entails all the costs of a legal process—currently avoided under the ombudsman system—which each individual complainant would have to fight. That is an absolute disgrace, and I look forward to the Minister commenting on the BSA's position.

I am disappointed that the consultation document produced by the Treasury on 28 February indicated that the regulation of mortgages through the Financial Services Authority is to be put back from 1 September 2002 to the second quarter of 2004. That is something for which we have been waiting for a long time, and it is sad to see it receding into the distance. I remind the Economic Secretary of the position adopted by her predecessor, my right hon. Friend the Member for Airdrie and Shotts (Mrs. Liddell), who said of the mortgage code:

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The events of the past year mean that it is no longer "too soon." It is absolutely vital that comprehensive regulation is introduced as soon as possible.

1.20 pm

The Economic Secretary to the Treasury (Ruth Kelly) : It is a pleasure to serve under your chairmanship, Mr. O'Brien. I congratulate my hon. Friend the Member for Brent, North (Mr. Gardiner), who takes great interest in these matters, on securing the debate. It provides me with an opportunity to respond to his specific points and to outline the Government's underlying approach to mortgage regulation.

The idea behind the Government's approach is to secure a fair deal for the consumer, while acting in a proportionate manner. We do that by creating an environment in which the consumer is able to make informed, intelligent decisions about financial services, and by ensuring that there are appropriate redress mechanisms in place if a problem arises, whether it is a generic issue affecting a large group of people or a specific issue affecting one or more individuals. Regulation plays an important role, but it is not the only tool in our toolbox. It is certainly not the first thing that we think of when we consider how to make markets work more effectively. There are many other things that we can do: improve the information available to consumers, improve consumer education, promote sharper competition among product providers, encourage the development of voluntary industry codes, set benchmarks for products and so on.

The creation of a single regulator, the Financial Services Authority, is the centrepiece of our policy. As a single regulator, it is in a much better position to respond to a financial services sector in which firms and intermediaries operate in several different markets, in which products are bundled and in which innovations in products, design and marketing occur at an ever-increasing pace. A single regulator also creates a regulatory system that is easier for consumers to understand. Firms and consumers no longer have to deal with an alphabet soup of different regulators, each with different rules and approaches.

The creation of a single ombudsman service is another crucial development. The Financial Ombudsman Service is a one-stop shop for redress when a firm authorised by the FSA is unable to resolve a consumer complaint, and it can step in as an independent, informal and user-friendly alternative to court action for the consumer. The FOS is an important part of the overall consumer protection provided by the Financial Services and Markets Act 2000. It is free to consumers, and its decisions are binding on authorised firms, including mortgage lenders.

In that context, toward the end of last year I examined the general regime for mortgage and general insurance regulation. Specific events had occurred since the original decision to regulate mortgage lenders was taken in January 2000. For example, about a year ago DeAnne Julius was asked to chair an independent review of the banking and mortgage codes to examine the benefits they delivered to consumers. Her report raised the issue of mortgage advice regulation and argued that self-regulation was not a sufficiently strong regime for mortgage service standards. I shall take my hon. Friend's comments today as giving added impetus to that recommendation.

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I also received strong representations from consumer groups and industry that mortgage advice and advisers should come under the FSA umbrella. In the light of those representations, and taking into account regulatory and market developments, I concluded that there would be significant benefits to consumers from regulating the quality of advice and the qualifications of advisers. Although there is already much good practice, I expect that there will be a higher standard of advice available across the board. Consumers will have to deal with only one agency for compensation and redress, whatever their financial services problems.

To respond to the intervention of my hon. Friend the Member for Harrow, West (Mr. Thomas), episodes such as the Paragon Finance home loans example are one of the reasons why we have found it necessary to take further steps to regulate the mortgage market more generally. The decision not only benefits consumers but streamlines regulations for brokers who already deal with the FSA in other lines of business. Mortgage regulation is expected to come into force during the second quarter of 2004 alongside that of general insurance.

I shall explore some of the recent events outlined by my hon. Friend the Member for Brent, North. He is particularly concerned that in the light of an FOS decision on a specific case, banks and building societies should be required—I take it that this was his suggestion—to put right all similar cases instead of doing so only in response to individual complaints. I shall stand corrected if his meaning was different.

I understand why my hon. Friend finds that idea initially attractive, but it would blur an important distinction that is central to the way in which we regulate. To tamper with that distinction would be detrimental to consumers, bad for the industry and would risk creating two separate regulators operating with different remits. We try to maintain a clear distinction between complaints handling and regulation. The FOS is available to consider individual complaints, whereas my hon. Friend's argument relates to regulation.

The prudential regulation of banks and building societies—ensuring that they maintain sufficient resources and appropriate systems and controls—is the

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responsibility of the FSA. Standards relating to conduct of businesses for mortgages are currently set out in the mortgage code. It is the role of the Mortgage Code Compliance Board to ensure that personal customers receive a fair deal from the banks and building societies that subscribe to the code. As I said earlier, the decision has been made to transfer mortgage advice and intermediaries to the FSA in 2004.

In practice, the distinction between regulation and complaints handling works well and in the interests of consumers. It enables regulators and ombudsmen to concentrate on their core tasks and avoids their diluting the authority and expertise of one another.

Mr. Gardiner : I appreciate the distinction and I am cognisant of the dangers that would arise if every complaint to the FOS were decided generically and applied to every other case. However, my hon. Friend should take on board the fact that as soon as the lower variable rates were introduced by companies, a whole category of contracts into which those companies had entered were effectively rendered fraudulent. At the moment, the only redress has been through the FOS, but consumers are entitled to regulation that stops such wholesale abuse by companies. I urge her to meet the mortgage lenders involved and encourage them to sort out the problem now. I believe that some arse-kicking now by my hon. Friend will speed up the process.

Ruth Kelly : I thank my hon. Friend. Our diagnosis of the problem is somewhat different. As I understand it, the ombudsman has criticised the information provided to consumers at the point of sale and the ability of lenders to differentiate the rates at which they provide loans to their customers. The core criticism is of the information provided rather than of the system. The FSA is considering how to define and operate its new system of treating consumers fairly and I am sure that it will examine that, but it is for the FSA, not the Treasury, to decide. However, I am certain that it will hear the concerns that my hon. Friend has outlined and consider them seriously.

I thank my hon. Friend for his interest in these issues. Consumers throughout the country will want to follow the debate. He has raised important matters that he should also take up with the Financial Services Authority.

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