During the last 18 months or so a good number of banks have increased their standard variable and tracker rate mortgages citing as their reasons for doing so a rise in their cost of funding and compliance with the regulators’ requirements to increase their reserves.
The question is, given that the Bank of England Base Rate hasn’t changed since it hit its all time low in Spring 2009, Basel II compliance is a known fact for each bank and compliance with the tougher Basel III rules has been pushed out to 2018, is it (i) reasonable; and (ii) legal for individual banks to impose the increases they did in 2012 for the reasons they gave, and not reverse them and hand the money back?
Let’s put this in context. As I write this in November 2013, the banks remain in big trouble (even if their accounts don’t always show it) with many massively exposed to the property market, they’re reducing how much they’re lending out, increasing their net interest margin (charging customers more to borrow while at the same time paying little or no interest to depositors), managing their delinquent debts so that they keep their write offs to a minimum, and changing the way they’re funded. It’s not an easy time to be managing a bank, there’s a fine balancing act to be struck. Getting it wrong could prove disastrous for individual banks, the whole financial sector and our way of life in the West.
Many hundreds of thousands of borrowers feel abused right now. They are incandescent with the increases that have been imposed on them. They cite the factors mentioned above. They feel abandoned by the regulator. They feel they are bearing more of the burden than they should for rebuilding the banks’ balance sheets. And who can blame them, after all when they borrowed the money they thought they understood the parameters under which they were borrowing. As a consequence MPs have been bombarded with complaints from disgruntled constituents. The regulators meanwhile seem uninterested, regardless of whether the complaint is about regulated or unregulated lending – we’re being let down by a system we’ve been assured has been strengthened.
So are the increases reasonable? The banks would argue that by charging less than 5% interest on a standard variable rate or tracker mortgage, borrowers are paying less than the long term average mortgage interest rate. They feel that exceptional circumstances – the near collapse of the banking system – demand exceptional actions. And a 2 or so per cent rise is within the boundaries of what’s reasonable in the circumstances. Borrowers feel otherwise, they feel they’re being taken advantage of, they’re being asked to pay more than their fair share of the cost of rebuilding the bank just because with few banks really lending right now the option of moving isn’t really on.
But are their actions legal? The banks think so otherwise they wouldn’t do it. They’ve obviously had the most expensive lawyers in the land crawl over the legal documents with a fine toothcomb and feel they’re near invincible. Borrowers believe the banks’ actions are illegal, that they had a deal that rates would closely follow the Base Rate and that that link has effectively been broken. And some are determined to prove it.
The reality is they’re both right, to a degree. Exceptional circumstances do demand exceptional actions. Reasonableness doesn’t come into the equation, legality is the key issue. And I believe the real question we should all be asking is:
‘Is this particular bank’s actions legal given:
- The formal legal relationship existing between the parties
- The particular circumstances applying in this / the bank’s case, including the bank’s financial situation?’
The situation is different in every case – so borrowers’ hopes that one legal case taken by an aggrieved set of borrowers against one lender will somehow set a binding precedent for everyone are probably forlorn.
From a forensic accountant’s point of view, I think these are the key issues:
a) What do the documents say, exactly? – the actual words used in the documents and how they all fit together are vital. Do they give rise to a doctrine of contra proferentem issue.
b) What other parties are involved, such as mortgage advisers, brokers and lawyers? If no, bad or incomplete advice has been given to the borrower, the advice is not properly evidenced as having covered the possibility of such events occurring as we’ve seen (bank takeovers, transfers of mortgages etc), or the adviser / lawyer is arguably conflicted say because his fees have been paid by the bank, is there an argument for bringing them into the action and involving their professional indemnity insurers?
c) What evidence is there that the circumstances in the contract giving the bank the ability to increase rates have been triggered in this particular case? What evidence is there that the bank’s cost of funding has risen, and by what amount? What evidence is there on the bank’s reserve position and its compliance with regulator requirements?
d) Has the bank done everything the documents require as a pre-condition for imposing the increase?
e) What evidence is there that the bank has calculated the increase properly having regard to the issues in c) and is not abusing its position? For example, can the bank explain why the increase is 2% and not say, 2.5%, 4%, even 8%? Has the increase been broken down into its constituent parts of (i) funding costs rise and (ii) regulator reserve requirements and do these calculations stand up to an accountant’s scrutiny?
f) Has the bank dealt with different borrowers in different ways, and if so, can doing so be justified to the court? Some banks imposed an increase on borrowers who came to them through mortgage brokers but not on those who came to them direct. Some have imposed smaller increases on borrowers who happen to live in the bank’s country of origin. Why?
It’s clear that key to aggrieved borrowers succeeding in an action against a bank, either for resisting the increase in rates or any repossession proceedings, is the extraction of best quality evidence to support the arguments being put forward in that particular case. Some of the vital evidence will come from the lawyer and forensic accountant acting for the borrower from publically available information. Some will have to come from the bank. The bank can be expected to do their utmost to resist efforts to release such confidential information. But release it they must, if the court is to be persuaded that their actions are legal and not just blatant profiteering at the expense of small, seemingly powerless, borrowers.