Mortgage record errors cost Bank of Scotland £4.2m fine from FSA

• Bank relied on incorrect records for ‘considerable periods of time’ between 2004 and 2011

• Over 20,000 customers incorrectly handed out over £20m worth of goodwill payments following errors over mortgage contracts relating to SVR

• Bank of Scotland breached FSA’s Principles for Business; mistakes stemmed from bank’s inadequate mortgage records system

Failures in the bank’s systems meant that it relied on incorrect records for “considerable periods of time” between 2004 and last year, the Financial Services Authority (FSA) said.

It said the mistakes stemmed from Bank of Scotland holding two separate systems for its mortgage information which were not properly linked up.

The problems came to light when the bank put a programme in place to correct the fact that some customers of Halifax, which is part of the same banking group, had received potentially confusing information about changes to their mortgage contracts relating to their standard variable rate (SVR), the FSA said.

The regulator discovered that a number of customers had complained on a consumer website that they had been wrongly left out of the programme and had not received any goodwill payments.

The mistakes grew even worse when Bank of Scotland incorrectly got in touch with 33,700 customers who should never have been included in the programme and mistakenly handed out £20.4m worth of goodwill payments to 22,700 of them.

Tracey McDermott, FSA director of enforcement and financial crime, said: “These mistakes stemmed from the fact that Bank of Scotland had an inadequate mortgage records system, meaning they could not identify which of those 250,000 customers were subject to a cap on their SVR.

“This breach is particularly serious because the inaccuracies built up over a period of seven years. There was no structure in place to identify errors as they occurred and no checking procedures thereafter.

“In a complicated organisation where several legacy systems exist, firms have to make sure they are synchronised, otherwise it is their customers who suffer.”

The bank agreed to settle with the FSA at an early stage of the investigation and the FSA said that, without this early settlement and the firm’s co-operation, the fine would have been £6m.

The incorrect records meant that around 15 per cent of the 250,000 affected Halifax mortgage customers did not receive important information regarding variations to their mortgages, and therefore did not have enough details to make informed decisions about their mortgage accounts.

Around 160,000 of these 250,000 customers were due goodwill payments under the programme, totalling approximately £162m, which may not have been received had customer complaints not been made, the FSA found.

Bank of Scotland has confirmed it will not try to claw back the goodwill payments it wrongly handed out to customers.

It said the vast majority of people who were meant to receive payments have now had them.

A statement released on behalf of the bank said: “In February 2011, Bank of Scotland agreed a voluntary arrangement with the FSA in relation to a goodwill payment programme regarding a particular group of Halifax customers who took out mortgages prior to September 2007.

“The issue related to the Halifax SVR cap and our recognition that the explanation of the cap in certain mortgage offer documents had the potential to cause confusion.

“After implementing this programme, it was identified that an additional number of customers were eligible for inclusion. We wrote to existing customers in November 2011, of whom all those entitled to payment have now received it.

“Bank of Scotland has apologised to customers, co-operated fully with the regulator and has agreed to pay a fine of £4.2m.”