Who pays when the bank gets it wrong?

Published on Friday 23 July 2010 21:22

The financial watchdog often sides with customers, writes Teresa Hunter, but borrowers have responsibilities too

SOME 10,000 Clydesdale customers will be reaching for the whisky bottle this weekend after being notified by the bank that they have been underpaying their mortgage and their monthly repayments will now have to climb by up to 200.

Yet a question mark hangs over whether the bank is entitled to insist they repay the cash, as it is doing, or whether, as it made the mistake, it should foot the bill.

The error occurred because a manual calculation was faulty. Each time interest rates were cut, the monthly repayment was cut by too much. As rates fell throughout the credit crunch, the error compounded at each reduction.

A Clydesdale spokesman said: "If rates had gone up, then the payment would have risen a bit too much as well. So if they had gone up and down like they usually do, there would not have been a problem. It was because they just kept going down and stayed low that these shortfalls began to appear."

The mistake came to light when the bank was carrying out its annual mortgage review, and found a discrepancy in the accounts of customers on variable and some tracker loans.

Nevertheless, homebuyers will be understandably furious that they are to suffer a sharp hike in repayments because of the bank's incompetence. They have been told they must either increase their repayments, settle the shortfall with a lump sum, or lengthen the term.

Yet in other similar cases, the bank has taken the hit, and the jury is still out over whether technically Clydesdale is correct to insist on the borrower making good the shortfall.

Mistakes at financial institutions are far from uncommon, because humans are always involved at some stage and prone to error. But they can leave consumers badly out of pocket and exposed when they finally come to light. The bottom line is, customers must check every piece of documentation and paper sent to them by their banks or insurers, and file them away for safe-keeping. The sooner an error is spotted, the greater your consumer protection.

We run through the mistakes to be on the lookout for, and examine who must pay for the error.

Mortgage muck-ups

Errors frequently happen on mortgage calculations. Most commonly, interest is calculated on an interest-only basis, when it is a repayment loan, or for the wrong term. The borrower, for example, might ask for a 15-year term, to subsequently discover it was set up over 25 years.

Similarly, a typing error might give a wrong repayment to a borrower, or part of the loan may be forgotten when calculating interest.

Or, as in the case of the Clydesdale fiasco, mistakes can creep in because of a systemic error with the calculation. Made once, it quickly compounds.

Who foots the bill for the error can be tricky. Borrowers have signed a contract, agreeing to pay a particular kind of interest on the loan, and repay it on a set date in the future. If they fail to do so, they are in breach of contract, or so the bank will argue.

On the other hand, the Financial Ombudsman sees many cases where it believes the institution is responsible for a mistake, and siding with the consumer, it holds the organisation culpable.

If the Financial Ombudsman decides the lender is "entirely to blame" it will order the bank to write off the capital shortfall, and will not even deduct the notional savings borrowers have enjoyed during the under-payment period.

Clydesdale borrowers will be advised to read the Ombudsman's technical mortgage note, in which it states: "In cases where the monthly repayment was too low, because the lender made an error ..., we will generally decide that the lender is entirely to blame."

This would seem to provide grounds for believing the bank should make good the problem. However, the Ombudsman's office pointed out that each case will depend on the individual circumstances of that account.

Where customers are aware a mistake has been made, and either should have spotted it because of the information they were sent, or who did see it and keep quiet, then the picture will look quite different.

In such instances, they are likely to be required to make good the shortfall, although might still see some small compensation for inconvenience and distress.

It is generally agreed that it is impossible for borrowers to calculate their monthly mortgage repayment, so they can not be held responsible for not spotting a mistake.

Nevertheless, if the repayment is so low as to have been obviously wrong, then it can be argued they should have suspected an error. It always makes sense to use the many online mortgage calculators to check that your repayment is in the right ball-park.

Where borrowers query a repayment with the lender, concerned that it is too low, and are reassured it is correct, then the bank will be held liable for compounding the mistake, in the face of customer concern.When they wrongly put cash into your account

Here the message would seem to be to spend it as soon as possible.

If the bank pays money into your account which doesn't belong to you and you don't spot this, but spend in good faith, then the Financial Ombudsman will normally side with the customer, and insist the bank accepts the loss.

However, if the sum is so large, it couldn't simply have been overlooked then the customer has a responsibility to alert the bank and repay the cash.

If excess funds arrive in your account, and although you don't spot the error, you transfer money into a savings account, then this cash too must be returned.

Where your insurance policy is not set up

Where you believe you have set up an insurance policy, for home, car or so forth, but discover when you come to make a claim, that no policy was ever initiated, because of an error at the company, then your claims should be met, regardless.

But this will depend on the exact contents of the paperwork you were sent, and whether premiums have been paid.

If the paperwork looked in order then you should be covered. For this reason, it is always important to check your documentation thoroughly.