This seven-page FOS investigation which ended in 2020 resulted from a complaint that was made by MAS5 customers Mr & Mrs H. They were put under pressure to accept a financial settlement and sign a non-disclosure agreement by MAS5 and the ethical Co-op Bank when it became clear that FOS was going to rule that the four SVR increases from 2009-12 were unfair (in fact, unlawful). In return, Mr & Mrs H had to withdraw their complaint. In court during the judicial review, at which I was present, MAS5's legal team claimed that the evidence that rate rises in the period 2009-12 were justified had been lost because these events were so long ago. That is not true, although I do not suggest that MAS5's lawyers knew this. The ethical Co-op Bank most likely did not mention this 2020 investigation because they thought it would never see the light of day.
In fact, the opposite is true - the 2020 investigation finds that the evidence used within MAS5 ***AT THE TIME OF THE INCREASES*** did not justify the SVR increases under the terms and conditions of the mortgage contract. The "evidence" was not lost - it was clearly very intact just two years ago, but it did not then and cannot now justify the SVR increases that took place. Ethical? The families who have lost their homes because of this fraud would probably say not.
Pictures of the original document are below this identical version which is easier to read:
our ref [redacted]
17 June 2020
please write to Financial Ombudsman Service
Exchange Tower London
dx 141280 Isle of Dogs 3
Mr and Mrs H complain about the interest rate Mortgage Agency Services Number Five Limited (MAS5) has charged on their mortgage. They’re unhappy their mortgage was sold to a lender that doesn’t offer new interest rates, and they feel trapped paying a higher rate of interest than they would pay if they were with a high street bank. They complain this isn’t fair.
Mr and Mrs H took out an interest only mortgage in February 2007. The mortgage was transferred by the original mortgage lender to MAS5 in June 2007. The mortgage was taken out on an initial fixed rate of 6.39% until April 2009. The mortgage offer stated that after this date the mortgage would revert to the lender’s standard variable rate (SVR) (which was 7.24% at the time of the offer), for the remaining term of the mortgage. When Mr and Mrs H’s mortgage moved onto the SVR in April 2009, it was 2.99%. Since then, whilst the mortgage has remained on MAS5’s SVR, the rate has varied as follows:
Mr and Mrs H have looked at other rates and mortgages available on the market, but have said they haven’t been able to move to a new lender because they struggle to meet other lenders’ criteria. Their mortgage is also in arrears. They told us they put their house on the market in 2018 to try and repay the mortgage, but house prices were decreasing so they were worried they wouldn’t get enough from the sale to repay the mortgage.
In 2018, Mr and Mrs H complained to MAS5 about the interest rate on their mortgage. They felt it was unfair their mortgage was sold without their knowledge or consent from a lender that offered interest rate products to one that hasn’t and doesn’t. They felt the interest rate MAS5
has charged is unfairly high compared to rates offered by high street lenders. They complained that they were trapped.
MAS5 didn’t uphold the complaint. It explained Mr and Mrs H had been notified when the mortgage was transferred, and the terms and conditions they agreed to when they took it out had not changed. It explained that it doesn’t offer new rates to any customers so couldn’t offer them any other products.
Mr and Mrs H brought their complaint to our service. They asked a representative [redacted], to join the complaint – but for ease, I’ll refer to Mr and Mrs H throughout.
Mr and Mrs H made a number of complaint points to our service. In summary, they complain that:
Since Mr and Mrs H brought their complaint to us, MAS5 has offered to work with them to help bring the mortgage out of arrears – which should open up more options for them. MAS5 has temporarily reduced the interest rate charged on the mortgage by 3% for six months. It’s also given Mr and Mrs H a three-month payment holiday due to the impact of the current pandemic. It’s said it will consider what support it can provide at the end of this period based on Mr and Mrs H’s circumstances at the time.
Mr and Mrs H have confirmed they’d still like our service to consider the interest rate they’ve been charged historically, and MAS5 has given our service consent to consider those parts of the complaint which might have been brought out of time.
As part of our investigation, amongst other things, we’ve asked MAS5 to provide evidence to support its reasoning for the increases it made to its SVR over time. MAS5 has provided this information to our service but asked us to treat it in confidence, as it contains commercially sensitive information.
I’ve reached my view based on the information our service has received so far. If either party provides more information following this view, it’s possible the outcome may change. But at this stage it seems both parties have provided everything they want me to take into account – so this is what I’ve considered when reaching my outcome.
I’ve considered all the available evidence and arguments to decide what’s fair and reasonable in the circumstances of this complaint.
Mr and Mrs H have raised a number of concerns about how MAS5 operates generally, and the number of borrowers that have been affected as a result. I want to explain that whilst I’ve considered their concerns carefully and listened to what they’ve said – the role of our service is to investigate and resolve individual disputes between consumers and businesses.
We don’t have the power to investigate wholesale concerns about a business’s operation and how many people this may affect. That is the role of the regulator. So whilst I understand Mr and Mrs H have wider concerns, in this view, I’ll only be considering the actions of MAS5 in respect of Mr and Mrs H’s mortgage – and the specific impact it’s had on them as borrowers.
The transfer of the mortgage
Mr and Mrs H feel they’ve been disadvantaged as they agreed to take out a mortgage with a lender that offered interest rate products, but their mortgage was then transferred to a company that didn’t offer new interest rates. They’re unhappy they weren’t given a choice about this and now they feel trapped with the transferee.
When Mr and Mrs H agreed to take out this mortgage, they agreed to the terms and conditions attached to it, which were set out by the lender. These explained how the mortgage would operate. In these terms and conditions, it says that the lender’s rights under the mortgage can be transferred at any time. I’ve seen evidence that the lender wrote to Mr and Mrs H at the time of the transfer to tell them about it. So I’m satisfied they were made aware. I know that a clause like this is standard in just about all mortgage agreements across the industry.
I know Mr and Mrs H feel this is unfair, and feel they’ve been put in their current position because their mortgage was transferred to a company that doesn’t offer interest rates other than the SVR, which I do empathise with. But the original mortgage offer Mr and Mrs H agreed to states the mortgage would move on to the SVR after the initial interest rate product was due to end in 2009. There was nothing in the mortgage offer, or the terms and conditions of the mortgage, that state they would be entitled to, or guaranteed, other interest rates after this.
As MAS5 has explained, once Mr and Mrs H’s mortgage moved onto the SVR, there were no early repayment charges applicable if they wanted to move their mortgage elsewhere to a lender that did offer better interest rates. But unfortunately, Mr and Mrs H haven’t been able to find another lender that has been willing to offer them a mortgage with lower rates – due to their individual circumstances.
Whilst I’m satisfied the transfer took place in line with the terms and conditions of Mr and Mrs H’s mortgage, this doesn’t necessarily mean they’ve not lost out as a result. The fact of the matter is that Mr and Mrs H have found themselves a customer of MAS5 not through their own choice, and they’ve been unable to move their mortgage elsewhere. So whilst I’m satisfied the transfer of the mortgage was not in itself unfair, I’ll now go on to consider whether I think MAS5 has treated Mr and Mrs H fairly since the mortgage has been with them, taking all of this into account, which is what I think is at the heart of Mr and Mrs H’s complaint here.
MAS5’s standard variable rate (SVR)
When MAS5 bought Mr and Mrs H’s mortgage in 2007, it had an agreement in place with the lender about the interest rate it could charge. As a result of this, MAS5 was restricted in how high it could set its SVR above the Bank of England base rate. Following the transfer, the base rate fell considerably, and as a result, so did the SVR MAS5 charged. It had gone from charging a rate of 7.5% when it took over the mortgage, to charging 2.99% by April 2009. At this point, the restriction that MAS5 had agreed with the previous lender was lifted, and it began to increase its SVR shortly after.
Since April 2009, MAS5 has made four changes to its SVR that haven’t resulted from an immediate change in the Bank of England base rate. It’s said each variation to the interest rate was made in line with the terms and conditions of the mortgage. The relevant condition of the terms and conditions is below:
3.1 If the interest rate is the standard variable rate we may vary it for any of the following reasons:
I’ll now go onto consider the four changes MAS5 made between 2009 and 2012, and whether I think it varied the SVR fairly, taking into account the terms and conditions of the mortgage.
When doing this I’ve also thought about the relevant law, which in this case is the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR). In summary, regulation 7 of UTCCR says that any written term of a contract should be expressed in plain, intelligible language. And where there’s doubt about the meaning of a written term, the interpretation which is most favourable to the consumer shall prevail. So I’ve kept this in mind when considering what’s happened.
Where one party to a contract is given a discretion like that under condition 3.1 to make decisions that affect the rights and obligations of the other party, it is often necessary to imply a term limiting the manner in which that discretion can be exercised. Although I believe that such a term is to be implied into this mortgage agreement, I have not found it necessary to examine its application in this case, because I think the express conditions of the mortgage agreement lead me to an answer that won’t be changed by considering additional obligations on MAS5 that arise from the implied term. But that is not to say that those obligations can’t become relevant if further evidence is provided to me.
The two increases in 2009
In 2009, MAS5 increased its SVR from 2.99% to 4.5% - split over two separate increases. It’s told us that when it made these changes, it relied on sub conditions (b) and (c) of condition 3.1 of the mortgage terms and conditions above.
Sub condition (b) says it can vary the interest rate ‘to reflect a change which has occurred, or which we reasonably expect to occur, in the cost of the funds we use in our mortgage lending business;’
MAS5 has said that whilst the SVR was falling in line with Bank of England base rate, it was forced to absorb increases in its funding costs that weren’t passed onto borrowers. So once the restriction was lifted, it needed to increase the SVR to make up for the increased costs it had absorbed during this time. It’s helpfully provided detailed information to show us what was considered internally at the time of the increases.
I appreciate that MAS5 was limited in the rate it could charge borrowers whilst the restriction was in place. And so it’s likely that if its costs did increase during this restricted period, it wouldn’t have been able to pass these on in a way that it normally might - by increasing the interest rate borrowers paid on their mortgage. However, so far MAS5 hasn’t provided any evidence to show the costs of the funds it used in its business increased during this time. So I’m not satisfied it’s demonstrated a need to increase the SVR in line with sub condition (b) in 2009.
Separately I also observe that, unlike the original lender which undoubtedly used funds in a mortgage lending business by making advances to borrowers such as Mr and Mrs H, MAS5 ran a “closed book” of loans it had purchased after they had been made. I have so far seen nothing to show that MAS5 actually carried on any “mortgage lending business” within sub condition (b). I interpret that phrase in accordance with its ordinary and natural meaning, as referring to the business of advancing (rather than just purchasing) loans secured by mortgages.
MAS5 has also said it relied on sub condition (c) to justify its increases to the SVR in 2009.
Sub condition (c) says it can vary the interest rate ‘to reflect a change which has occurred, or which we reasonably expect to occur, in the interest rates charged by other mortgage lenders;’
It also provided us with a comparison of what MAS5 was charging during this period, in relation to what it says are other comparable lenders. This does show that MAS5’s SVR had fallen below what those lenders were charging in the market around this time. However, since 2007 when MAS5 took over this mortgage, the trend in interest rates charged across the market was downwards. So whilst MAS5’s SVR had fallen more drastically than those charged by other lenders – the mortgage interest rate market as a whole saw reductions.
MAS5 has explained that it increased the SVR in 2009 to align it with the other rates charged in the market at the time, as well as within the Britannia group (as it was at the time). And I understand its reasons for wanting to do this. But the terms and conditions don’t allow for making changes to ‘align’ with other rates. Sub condition (c) specifically says the change can be made ‘to reflect a change which has occurred, or which we reasonably expect to occur…’
Now it’s not entirely clear what the term ‘to reflect’ means here in this context, but MAS5 hasn’t pointed to any specific changes made by other lenders which would justify its own increase in the SVR. As far as I can see, the changes that had been made by other lenders were reductions, not increases. MAS5 hasn’t said it increased the SVR based on an expected
change. So considering the information provided, I’m not satisfied MAS5 has increased the SVR in line with what sub condition (c) allows for.
MAS5 may wish to provide more information to show why it’s satisfied these increases met the terms and conditions at the time. But based on the information and evidence I’ve seen so far – I’m not satisfied the increases MAS5 made to its SVR in 2009 were in line with the terms and conditions of Mr and Mrs H’s mortgage.
The increases in 2011 and 2012
In 2011 MAS5 increased the SVR to 5.25%, and further increased it in 2012 to 5.75%. For both increases it says it relied on sub condition (b) as the reason for the changes.
MAS5 has helpfully provided us with confidential internal documents which show how these increases were justified internally at the time, and the information that was taken into account. However, based on what it’s sent us so far, I’m not persuaded the evidence demonstrates it made these increases in line with sub condition (b).
Once again, sub condition (b) says the interest rate can be varied ‘to reflect a change which has occurred, or which we reasonably expect to occur, in the cost of the funds we use in our mortgage lending business;’.
In the definitions section of the terms and conditions it says, ‘“we”, “us” and “our” refers to [the original lender] and anyone who at any time in the future is entitled to exercise our rights under the mortgage including:
(a) any transferee; …’
A “transferee” is defined as ‘anyone who is entitled to exercise any of our rights under the mortgage as a result of a transfer by us.’
So essentially, this means that the ability to change the interest rate is held by the transferee – which in Mr and Mrs H’s case is MAS5. Now this is an important distinction to make, as MAS5 is the legal entity that owns Mr and Mrs H’s mortgage. So it follows that in order to satisfy sub condition (b) of the terms and conditions, MAS5 would have to demonstrate that the cost of the funds it uses specifically in its mortgage lending business (if it operated such a business) increased.
Whilst MAS5 has provided information to show that the costs of funds increased around this period for the group of companies to which MAS5 belonged, it hasn’t provided anything that relates specifically to MAS5’s own costs, or how these might have changed around this time.
If MAS5 is able to provide evidence which shows the costs of funds for its own lending business (if it ran one) increased, I’d be happy to take this into account. But based on the information I currently have, I’m not persuaded these increases in 2011 and 2012 have been made in line with the terms and conditions of Mr and Mrs H’s mortgage.
Other complaint points
Mr and Mrs H have made other complaint points, such as the difference in SVR charged between Co-op Bank and MAS5, as well as the availability of Co-op rates to MAS5 customers. But given my current thoughts on the above issues, I think it would be practical to resolve this part of their complaint first – as it may well have implications on how we consider the remaining points.
Conclusion and next steps
For the reasons I’ve explained, based on the information currently available, I’m not satisfied MAS5 has increased the SVR in line with the terms and conditions of Mr and Mrs H’s mortgage. As a result, I think Mr and Mrs H have been treated unfairly.
Following responses from both parties, if my outcome remains unchanged, where relevant I will go on to consider the other complaint points Mr and Mrs H have raised, as well as determine what I think MAS5 needs to do here to put things right.
Based on what I’ve seen so far, I think it may well be fair and reasonable for MAS5 to re-work Mr and Mrs H’s mortgage account as if these four increases to the SVR never took place. That would mean the SVR that was charged in April 2009 (2.99%) would have stayed at that rate until the decrease in 2016 – which resulted from a change in the Bank of England base rate
- falling to 2.74% before rising again to 2.99% and 3.24% in accordance with the changes which MAS5 made to reflect subsequent base rate increases. In light of what I’ve said so far, I invite both parties’ comments on this, and what they consider fair redress would be here.
I think this is a fair outcome in the circumstances, for the reasons I’ve explained. But if you decide that you don’t accept what I’ve said, then please let me know by 1 July 2020. If I can’t resolve things then an ombudsman here can look at everything again and make a final decision. If I don’t hear from you by that date we might not be able to look at your complaint again.