Terms providing for the variation of charges in mortgage contracts
We have reviewed the fairness of terms in mortgage contracts that allow firms to vary their charges.
Background
In November 2007 we published a note that updated on our work on mortgage exit administration fees (MEAFs) (the November 2007 follow-up). This set out our concern, based on a review of a sample of firms' mortgage contracts, that some firms were interpreting our January 2007 Statement of Good Practice on MEAFs (the Statement) too narrowly and were not considering that the law and principles set out in the Statement could also apply to terms that vary other mortgage charges1. In the Statement we had set out our expectation that firms should review and, if necessary, amend their standard terms and conditions in light of the principles contained in the Statement.
Further review
We have now carried out a further review to see if, 18 months on from the Statement, firms have terms in their mortgage contracts that comply with the law and principles set out in the Statement. Our review focused on the issues we identified in the November 2007 follow-up and so assessed the fairness of terms that provide for the variation of charges in general, not just MEAFs.
As in our earlier work, we reviewed the mortgage contracts of a sample of firms comprising a significant proportion of the mortgage market, including major lenders who had been among the previous sample of firms and other lenders whose contracts we had not previously reviewed.
Results of further review
Disappointingly, the results of this further review suggest that the concerns we set out in our November 2007 follow-up have yet to be completely addressed. We found that about a third of the sampled firms have terms in their mortgage contracts that allow them to vary their charges which, in our view, do not comply with the law and principles set out in the Statement and so may be unfair. These include variation terms that:
- do not provide any reason for variation;
- allow variation without clearly and unambiguously defining any specific 'valid reason' (for example, by referring to 'any other valid reason') and without providing the consumer with both notice of the variation at the earliest opportunity and freedom to dissolve the contract immediately; and
- provide an invalid specific reason for varying charges.
We also found that some firms have terms in their mortgage contracts that do not comply with the law and principles set out in the Statement and so may be unfair because they put the burden of proof on customers, by requiring them either:
- to prove that increases to charges were not reasonable; or
- to pay charges on an 'indemnity basis'.
Our findings were similar for those firms that had updated or amended (or were about to amend) their terms since our November follow-up, which made up about half of the sampled firms. This suggests that some firms are failing to make use of the information we provide when reviewing and revising their contract terms.
Expectations
We have previously explained why we think the above types of term are likely to be regarded as unfair, and how they can be amended so that they are less likely to be regarded as unfair, including in the Statement and in the November 2007 follow-up. In addition, we set out in more detail our views on how firms may approach drafting fair variation clauses in general, in our May 2005 Statement of Good Practice and in our June 2008 report on the fairness of terms in consumer contracts.
In the June 2008 report, we stated our expectation that all firms should have fair terms in their standard consumer contracts. Our view is that in order to have fair terms, firms need to comply with the requirements of the Unfair Terms in Consumer Contracts Regulations 1999 and the principle of Treating Customers Fairly (TCF). We also reminded firms that, with the December 2008 TCF deadline approaching, unfair contract terms can provide evidence that firms are failing to treat their customers fairly.
Action
We are writing to those firms in the sample whose mortgage contracts contain terms that, in our view, are unfair. We expect them to amend or delete the terms in new contracts and not rely on them in contracts with existing customers. If necessary, we will take further regulatory action.
We will continue to monitor closely whether firms' terms comply with the law and principles set out in the Statement. Should it come to our attention that a firm's terms do not comply, we will consider the extent of the breach and what appropriate regulatory action to take. This may include, if sufficiently serious, enforcement or court action.
1 In this note, 'charges' refers to any fees, charges or expenses, usually set out in a firm's tariff of charges, which are payable by consumers in connection with the mortgage.