FINAL DECISION
Complainant:
Mr and Ms Y
Firm:
Cheltenham & Gloucester plc
Complaint Reference:
2000375376/B/MI/BLT2 – DVR/B
Date of Final Decision:
15 August 2002
Category
This is a case where the borrowers (Mr and Ms Y):
- had a Cheltenham & Gloucester “standard variable mortgage rate” mortgage;
- were tied in by an early repayment charge;
- did not ask to be linked to the C&G Variable Mortgage Rate before it closed;
- claim compensation from when that rate was first introduced.
Complaint
Mr and Ms Y complained that Cheltenham & Gloucester should have transferred them to its
new C&G Variable Mortgage Rate when that was introduced in 2001.
They referred to previous rulings by the Financial Ombudsman Service against other lenders
and against Cheltenham & Gloucester. They said that they understood there were some
differences, but the essential facts were the same for all.
In fact, the essential facts were not the same for all. So it is appropriate that I comment
briefly on the previous cases, though my decision on Mr and Ms Y’s complaint is based on
what I consider to be fair in all the circumstances of their case.
Cases involving other lenders
There have been ombudsman final decisions against three mortgage lenders in potentially
similar cases.
In lender A’s case:
-
Lender A originally had one standard variable mortgage rate. It introduced a new and
lower variable rate with a different name. It used the new lower rate for new variablerate borrowers, and also transferred most of its existing variable-rate borrowers to the
new lower rate automatically.
-
Mr and Mrs A complained that lender A continued to use a higher rate, which it described
as its standard variable rate, as the yardstick for their discount-rate mortgage. Mr and
Mrs A considered that the new lower rate had become the yardstick for their discount
rate.
-
The ombudsman decided that case in the light of the particular circumstances. These
included the description, in Mr and Mrs A’s mortgage contract, of the rate to which their
discount rate was linked.
K820x
-
In effect, the ombudsman decided that the new lower rate had become the yardstick for
Mr and Mrs A’s discount rate. This had happened automatically, from the date the new
lower rate was introduced.
In lender B’s case, there were similarities to the case involving lender A:
-
Lender B originally had one standard variable mortgage rate. It introduced a new and
lower variable rate with a different name. It used the new lower rate for new variablerate borrowers, and also transferred most of its existing variable-rate borrowers to the
new lower rate automatically.
-
Mr and Mrs B complained that lender B continued to use a higher rate, which it described
as its standard variable rate, as the yardstick for their discount-rate mortgage. Mr and
Mrs B considered that the new lower rate had become the yardstick for their discount
rate.
-
The ombudsman decided that case in the light of the particular circumstances. These
included the description, in Mr and Mrs B’s mortgage contract, of the rate to which their
discount rate was linked.
-
In effect, the ombudsman decided that the new lower rate had become the yardstick for
Mr and Mrs B’s discount rate. This had happened automatically, from the date the new
lower rate was introduced.
In lender C’s case, there were differences from the cases involving lenders A and B:
-
Lender C originally had one standard variable rate. It introduced a new and lower
variable rate with a different name. It used the new lower rate for new borrowers. It
advertised widely that its existing variable-rate borrowers could apply to transfer to the
new lower rate.
-
Lender C did not transfer any of its existing variable-rate borrowers to the new lower rate
automatically. It said this was because the new lower rate came with interest calculated
daily, rather than yearly as before. Existing borrowers needed to sign up to new
mortgage conditions before they could transfer to the new lower rate.
-
Mr and Mrs C had a capped-rate mortgage, under which they were to pay the standard
variable rate or a specified capped rate (whichever was lower). The new lower rate was
less than the specified capped rate.
-
Mr and Mrs C complained that lender C refused their application to link their capped-rate
mortgage to the new lower rate unless they first paid the early repayment charge
attached to their capped rate.
-
The ombudsman decided that case in the light of the particular circumstances. These
included the description, in Mr and Mrs C’s mortgage contract, of the rate to which their
capped rate was linked.
-
In effect, the ombudsman decided:
o
Mr and Mrs C agreed to pay the early repayment charge in return for the capped
rate. Lender C had agreed that otherwise it would treat them like ordinary variablerate borrowers with no early repayment charge.
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-
o
Ordinary variable-rate borrowers with no early repayment charge were free to
transfer to the new lower rate. So Mr and Mrs C should have been allowed to link to
the new lower rate without paying the early repayment charge.
o
Because the new lower rate was only available to ordinary variable-rate borrowers on
application, Mr and Mrs C should have been linked to it from the date they applied –
not from the date it was introduced.
[Following that ombudsman final decision, lender C closed the new lower rate to anyone
not already on it. Miss D complained. She had a capped-rate mortgage and had not
applied to be linked to the new rate until after it was closed. The ombudsman final
decision in that case went in favour of the lender.]
What Cheltenham & Gloucester did
Cheltenham & Gloucester used to have a single variable mortgage interest rate, which was
readily identifiable as its “standard variable mortgage rate“. But in March 2001 it issued a
press release that announced a change:
“C&G today announced its intention to introduce a new mortgage rate for existing customers
that will track the Bank of England Base Rate. The new C&G Variable Rate Mortgage will
provide existing customers with an option between a variable interest rate of 6.60% for
annual interest or 6.75% for daily interest. The new C&G variable rate becomes available
from 30 April 2001 and is guaranteed to track the Bank of England rate until 1 June 2003.
“The new rates will be available to all standard variable rate borrowers who are not already
benefiting from the terms of one of C&G’s existing special deals…”
The press release went on to explain that borrowers still “benefiting” from existing deals
would have to complete the remainder of the contract under the original terms, but would
then be able to switch to one of the two new rates. Cheltenham & Gloucester would write to
“eligible borrowers” from 1 May 2001 to offer them the option of switching to the new C&G
Variable Mortgage Rate.
When it was introduced (and for all the time that it was available) the C&G Variable
Mortgage Rate were less than what Cheltenham & Gloucester called its Standard Variable
Rate – by 0.75% if the daily interest option was taken, or by 0.9% for the annual interest
option.
Unlike some other lenders that introduced a lower variable rate, Cheltenham & Gloucester
reserved the C&G Variable Mortgage Rate for existing borrowers. It was not offered to new
borrowers.
On 10 September 2001, following press reports about ombudsman cases involving other
lenders who had introduced more than one variable mortgage rate, Cheltenham &
Gloucester announced that the C&G Variable Mortgage Rate would be suspended. It was
later withdrawn.
Borrowers who had moved to the C&G Variable Mortgage Rate were able to remain on it.
Cheltenham & Gloucester had not completed the mailing programme referred to in its press
release before it withdrew the new rate.
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Previous Cheltenham & Gloucester case
Mrs X took out her mortgage at a time when Cheltenham & Gloucester had a single variable
mortgage interest rate.
Her mortgage actually started with a fixed rate, but reverted from 1 November 2000 to
Cheltenham & Gloucester’s “standard variable mortgage rate”. She was tied in by a
redemption charge that applied until late 2002.
On 28 May 2001, when her mortgage was at the “standard variable mortgage rate”, Mrs X
applied to transfer to the new C&G Variable Mortgage Rate. Cheltenham & Gloucester
refused, because it considered that she was still “benefiting” from a special deal.
One of our adjudicators decided:
-
The rate available to new borrowers who wanted an ordinary variable-rate mortgage was
the rate Cheltenham & Gloucester called its Standard Variable Rate. New borrowers
could not apply for the C&G Variable Mortgage Rate.
-
But existing borrowers on Cheltenham & Gloucester’s “standard variable mortgage rate”
who were not tied in by a redemption charge and who actually applied to transfer to the
C&G Variable Mortgage Rate were allowed to.
-
Mrs X should have been treated, for interest rate purposes, the same as existing
borrowers on Cheltenham & Gloucester’s “standard variable mortgage rate” who were
not tied in by a redemption charge – who could apply to transfer to the new rate.
-
So, when Mrs X applied to transfer to the new C&G Variable Mortgage Rate from 28 May
2001, Cheltenham & Gloucester should have let her. To compensate Mrs X,
Cheltenham & Gloucester should:
o
recalculate Mrs X’s mortgage at the C&G Variable Mortgage Rate (on the annual
interest basis) from 28 May 2001, when she applied to transfer;
o
refund any overpayment; and
o
pay Mrs X £150 for the inconvenience which she had been caused.
Both parties accepted the adjudicator’s decision – so the case did not have to go on to an
ombudsman’s final decision.
Following this case, Cheltenham & Gloucester started to compensate other tied-in “standard
variable mortgage rate” borrowers who had applied to transfer to the new rate, while it was
available, and had been refused – running the compensation from the date they had applied
for the new rate.
Mr and Ms Y’s mortgage
Mr and Ms Y also took out their mortgage at a time when Cheltenham & Gloucester had a
single variable mortgage interest rate.
Their mortgage also started with a fixed rate, but reverted from 1 March 2000 to Cheltenham
& Gloucester’s “standard variable mortgage rate”. They were tied in by a redemption charge
that applied until early 2003.
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Unlike Mrs X, Mr and Ms Y did not apply to transfer to the new C&G Variable Mortgage Rate
during the time when it was available.
On 26 February 2002, when the new rate was no longer available, Mr and Ms Y complained
to Cheltenham & Gloucester. They claimed compensation equivalent to putting them on the
new rate backdated to 30 April 2001 when it was first introduced.
Cheltenham & Gloucester refused, because the new rate was only available on application –
and Mr and Ms Y had not applied for the new rate during the time when it was available.
As well as referring to their understanding of previous cases, Mr and Ms Y said:
-
Cheltenham & Gloucester said they were not entitled to the C&G Variable Mortgage
Rate because they did not apply for it whilst it was available. But they could not apply for
it because they had not been told about it.
-
Cheltenham & Gloucester’s withdrawal of the C&G Variable Mortgage Rate, after
preliminary rulings by the Financial Ombudsman Service against other lenders, showed
that Cheltenham & Gloucester recognised there was a problem.
Cheltenham & Gloucester accepted that it withdrew the C&G Variable Mortgage Rate
following preliminary rulings against other lenders. It said that these rulings did not involve
Cheltenham & Gloucester, but it thought it prudent to withdraw the C&G Variable Mortgage
Rate in view of the general uncertainty.
Decision
We are not regulators, and we do not have power to fix interest rates. The question to be
decided is whether, in relation to setting and changing the interest rate, Cheltenham
Gloucester failed to comply with the terms of Mr and Ms Y’s mortgage contract and the
legitimate expectations they were entitled to have under that contract.
Almost every business decision by a financial firm risks being criticised by one group of
customers or another.
-
The competitiveness of its products compared to others on the market, the speed (or
lack of it) with which it responds to competition, its pricing strategy, its advertising tactics,
the introduction of new products, the withdrawal of existing products – all are matters on
which its customers, or market commentators, may make positive or negative comments.
-
But the mere fact that a decision could be criticised or that its benefits for customers
might be debated (or even debatable) does not necessarily render it unfair. A firm’s
business strategy will ultimately be judged by success or failure in a competitive market.
There is a crucial distinction:
-
On the one hand, a firm makes many business decisions in the ordinary course of plying
its trade, legitimately exercising its commercial judgment in the interests of carrying on
the business. However much these legitimate commercial judgments might be criticised,
an ombudsman should not ordinarily interfere with them. It is not for an ombudsman to
say what a firm ‘could’ have done or what makes ‘business sense’.
-
On the other hand, a firm may indulge in some unfair or unlawful practice that has the
effect of causing a loss that a customer should not fairly be required to bear - or
withholding a benefit that a customer ought to have had a reasonable and legitimate
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expectation of receiving. In such cases, an ombudsman’s role is to require the firm to
remedy the matter, by reference to what it ‘should’ have done.
Unlike some other lenders that adopted dual variable mortgage rates, Cheltenham &
Gloucester did not transfer any of its existing borrowers onto the new lower rate
automatically. So existing borrowers only had access to the C&G Variable Mortgage Rate
by applying for it. New borrowers did not have access to it at all.
That was a matter for Cheltenham & Gloucester’s commercial judgment. It ran the risk that it
would be criticised by customers and market commentators who might compare its strategy
with competitor lenders who automatically transferred existing borrowers to lower rates.
It also ran the risk that borrowers who were not tied in by redemption charges, and so were
free to move at any time, would prefer to take their mortgage business to one of Cheltenham
& Gloucester’s competitors – including those who had transferred existing borrowers onto a
lower rate automatically. These were legitimate business strategy assessments for
Cheltenham & Gloucester to make.
In the case of Mrs X:
-
The adjudicator did not decide that the C&G Variable Mortgage Rate automatically
became Cheltenham & Gloucester’s “standard variable rate mortgage” when it was
introduced.
-
The adjudicator decided that Mrs X was entitled to the same access to the C&G Variable
Mortgage Rate as ordinary variable rate borrowers who were not tied in by a redemption
charge.
A lender making an attractive new product available to a large number of existing borrowers
might well be unable to cope with the administrative demand if a significant percentage of
those borrowers were all spurred to contact its branches at the same time. Unless it made
arrangements for contacts to be phased, it could create an unsatisfied demand that would
itself be the subject of complaints.
It is not for me to lay down exactly how a lender should approach such a task. It depends on
weighing a number of (sometimes conflicting) commercial and practical considerations,
which it would be inappropriate and impracticable for me to judge. These include:
-
the size of the audience the lender needed to address;
the resources available to communicate with that audience;
the potential demand that might result;
the resources available to respond to that demand;
matching resources to demand in order to provide an acceptable level of service; and
the costs and benefits involved.
In my view, the exact way and timetable Cheltenham & Gloucester adopted to communicate
the availability of the C&G Variable Mortgage Rate to borrowers was legitimately a matter for
Cheltenham & Gloucester’s commercial judgment, with which it would not be fair and
reasonable for me to interfere.
No Cheltenham & Gloucester borrower was able to apply for the C&G Variable Mortgage
Rate once it was withdrawn. In that respect, Cheltenham & Gloucester did not discriminate
between borrowers who were tied in by an early repayment charge and those who were not.
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I consider that Cheltenham & Gloucester’s decision to withdraw the possibility of applying for
the C&G Variable Mortgage Rate was legitimately a matter for Cheltenham & Gloucester’s
commercial judgment. It is not for me to say that a mortgage product must not be
withdrawn, or to specify when it may be withdrawn.
Accordingly, I have come to the following conclusions:
-
There was nothing in Mr and Ms Y’s mortgage contract that prohibited the introduction of
the C&G Variable Mortgage Rate or required that they be linked to it automatically.
-
For a period the C&G Variable Mortgage Rate was available to ordinary variable rate
borrowers who were not tied in by a redemption charge. But such borrowers had to
apply for the new rate during the period when it was available.
-
The fact that the C&G Variable Mortgage Rate was made available only on application,
the way it was publicised and the subsequent decision to withdraw it were all commercial
decisions for Cheltenham & Gloucester to take.
-
The way in which those commercial decisions were taken by Cheltenham & Gloucester
did not breach Mr and Ms Y’s mortgage contract, nor defeat any legitimate expectation
they ought to have had under that contract.
-
Mr and Ms Y were legitimately entitled to expect that the rate available to them would be
the rate available to ordinary variable-rate borrowers who were not tied-in by a
redemption charge, and on the same basis.
-
Accordingly, Mr and Ms Y were entitled to the same access (no better, no worse) to the
C&G Variable Mortgage Rate as ordinary variable rate borrowers who were not tied in.
-
No borrower could apply for the C&G Variable Mortgage Rate after it was withdrawn. So
Mr and Ms Y were treated no differently from ordinary variable rate borrowers who were
not tied in by a redemption charge.
My decision is that I do not uphold the complaint, and I do not require Cheltenham &
Gloucester to pay Mr and Ms Y any compensation.
Roger Yeomans
Ombudsman
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