Mortgage offer contract under fire for lack of clarity

Oct 25th '19

Last month, the Financial Conduct Authority (FCA) published a Notice of Undertaking from the Co-operative Bank, detailing a change the bank had made to its mortgage offer document.


The change came about in response to concerns raised by the FCA regarding the clarity of one of the terms in the document.


What concerns did the regulator have?

The Authority’s concerns related to a lack of clarity in one of the contract’s terms.


Clarity is a real priority for the regulator; its rules around communications being fair, clear and not misleading are a core element of its work.


The relevant term in the contract stated ‘If we agree additional borrowing, it will be charged at the interest rate applicable at the time……’


The FCA was:


‘concerned that the wording “the interest rate applicable at the time” was ambiguous as it was not clear what interest rate would be charged. The term had the potential to give the firm the discretion to charge any number of interest rates. This could cause detriment to consumers as they would be unable to understand what rate of interest they would pay.’


How did the bank respond?

The bank gave the FCA an undertaking that they would make changes as a result of the regulator’s concerns. It told the Authority that the term had been in use since March 2008, but agreed that it was ‘not as clear as it could have been’.


As a result, the term was amended. It now shows that:


the interest rate charged for additional borrowing will be based on the firm’s range of additional borrowing rates which are set out on their website. The new term also explains that the interest rate could be higher than the existing interest rate a consumer is paying for their main mortgage account.’


The Co-operative Bank wrote to approximately 69,000 existing consumers to inform them about the new term, and agreed to apply the unclear term ‘in a fair way’ until the new term came into use.


It also agreed to carry out a redress exercise, identifying consumers who may have been affected by the unclear term and providing redress where it was appropriate to do so.


Up to September this year, this exercise had led the firm to estimate that £3.4m redress will be paid to approximately 1,200 consumers who had taken a further advance between March 2008 and May 2019.


Contracts entered since February 2019 have contained the new term, and the FCA was keen to point out in the Notice of Undertaking that the bank had fully co-operated with the regulator in resolving its concerns.


What does this mean for consumers?


  • Increased clarity: the change made should make it clear to consumers what rate of interest they will pay if the firm agrees to provide any additional borrowing.
  • Redress for those negatively affected by the unclear term: consumers who are entitled to redress have been contacted by the firm.


What does it mean for other regulated firms?

The regulator’s actions to tackle what it sees as unclear or unfair terms should act as a timely reminder for other firms.


Unclear, unfair and misleading promotions are on the regulator’s radar. It’s worth double checking your own communications to make sure they treat customers fairly.


Make sure your small print is fair; with integrity in the spotlight, firms are more likely to stay on the right side of the FCA if they ensure they are communicating in a way that is fair, clear and not misleading. This is particularly the case when you deal with vulnerable consumers.


Customers who do feel they have been unfairly treated have a number of sources of redress, either by complaining direct to the firm in question or, if that yields no results, contacting the Financial Ombudsman Service.


Releasing the details of the Notice of Undertaking, the FCA stated that it ‘can challenge firms using terms that we view as being insufficiently transparent’. It also reminded firms that: ‘Even if firms have not given an undertaking or been subject to a court decision they should remain alert to undertakings or court decisions concerning other firms as part of their risk management.’


Brush up on the FCA’s requirements around fair treatment of customers

If this has prompted you to revisit your own approach to the Treating Customers Fairly rules, you might want to download a copy of our TCF FAQs. They summarise the requirements and look at what firms need to do to comply with them.


How can we help firms?

We offer a complete solution with a range of cost effective, regulatory compliance and marketing products and solutions that are uniquely suited to supporting firms.


Explore our full range today.