§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Mike Hall.]
11.30 pm§ Mr. Barry Gardiner (Brent, North)I may not look like Barbra Streisand, but since the title of this Adjournment debate was published, I too have known what it is like to be hounded by the paparazzi. It has seemed like every mortgage lender in the country has beaten a path to my door to explain why their products are fair and reasonable, and why others—usually their competitors' products—are not. When I first approached Madam Speaker's Office and proposed a title for this debate, I suggested "Mortgage Rip-Offs". I must compliment the Speaker's assistant secretary for the courtesy and tact that he showed in persuading me that "Mortgages and Unfair Contract Terms" might be more appropriate. So what are these unfair contract terms, and why do so many people feel that they have been treated badly by their mortgage lender?
I shall first examine extended redemption penalties— or lock-ins as they are often known. Back in the days of the Conservative Government in 1994, with a stagnant housing market and the curse of negative equity, mortgage lenders tried to find a way to kick-start the housing market. They offered deals that were front-loaded to home buyers: discounted rates, fixed-rate schemes and even cash back. Clearly, the only way in which lenders could recoup the cost of such low-rate schemes was by locking borrowers into their standard variable rate for several years after the initial incentive had run out.
I am a fair-minded person, and if that were all there were to extended redemption penalties, I would say "fair enough". So what is the problem? It is this: if one signs a contract that committed one for five years to pay a supplier of orange juice, one would expect the contract to specify the cost that one could incur for the whole five years. If the price charged by the supplier could vary from year to year depending on the orange crop harvest, one would expect the fluctuating cost to be related to some index—the orange market juice index, perhaps—which would govern the shift in the cost that one would have to pay for one's juice.
One would not be happy with a contract that allowed the supplier to vary the cost of the orange juice after the first year by any amount that the supplier chose. One would certainly not be happy if the orange market index were falling yet the supplier could charge the same or even a higher cost for the juice or if one faced massive financial penalties for breaking such a contract and refusing to pay that inflated cost.
Such a contract would be one-sided; its terms would be unfair—or, in the language used outside Madam Speaker's Office, a rip-off. One would not be happy, yet that is exactly what happens when one purchases a mortgage with extended redemption penalties.
Let us imagine that someone takes out a two-year fixed rate that locks them in for three years beyond that to the lender's so-called standard variable rate. The person may not appreciate that the standard variable rate does not have to track any external index; it can entirely ignore the Bank of England base rate. Borrowers do not know—indeed, cannot know—what they are signing up to when they 399 agree to the contract. If subsequently they find that the contract is not acceptable, they face an often more unacceptable premium to bail out.
Two years ago, Mr. Pearson-Miles took out a two-year fixed rate mortgage with the Alliance and Leicester for £75,000. The mortgage was described as "portable". Now, he is moving to a bigger house, and needs to increase his mortgage, but the terms offered by Alliance and Leicester for the new bigger loan are not as favourable as those that it gives even to its new customers, and they are certainly not competitive.
Mr. Pearson-Miles has a choice. He can either pay the higher rate to Alliance and Leicester plc, where he is locked in for the next five years, or he can pay a £3,000 premium to take his mortgage business elsewhere. Mr. Pearson-Miles is unhappy. Mr. Phillips was even more unhappy. In 1992, the day after the exchange rate mechanism fiasco, he took out a 10-year fixed mortgage with NatWest, at a rate of 9.95 per cent. With interest rates falling to 5.5 per cent., NatWest made a large profit out of Mr. Phillips, who had paid well over the odds for more than five years on his mortgage. Sadly, Mr. Phillips and his wife separated and the house had to be sold after seven years.
One might have expected NatWest to be sympathetic. After all, it had made a huge profit from Mr. Phillips's fixed rate. More than that, he was taking his subsequent mortgage from NatWest. Not a bit of it. NatWest insisted on levying an early redemption charge of £5,000 because Mr. Phillips had paid off his £100,000 debt before the 10 years were up.
In a case cited by the Consumers Association, NatWest asked for £41,000 in a redemption penalty to pay off a £60,000 mortgage. That is £101,000 to pay a £60,000 debt. I think that most people would say that that is a rip-off.
It is sometimes argued by mortgage lenders that lock-ins are not unfair in practice because no lender can afford to have an uncompetitive standard variable rate, so lenders cannot take advantage of borrowers who are locked in by redemption penalties by charging an excessive variable rate. Sadly, that is not true.
Ten years ago, prospective borrowers would compare the variable rates on offer, but that is no longer the position. Most lenders do not use the standard variable rate to compete for new business. They use the much more eye-catching fixed rates or capped-rate deals. Fewer and fewer borrowers every year are on the standard variable rate, without being locked in, because consumers are getting wise to the need to remortgage.
Even between the major high-street lenders there is a broad range where variable rates differ by as much as 0.6 per cent. This variation makes it impossible to tell up front which fixed rate will prove more competitive over the life of the fixed and penalty period combined. Such a lack of transparency in what is normally the largest financial contract most people enter into is a scandal.
There is another scam to which I draw the attention of the House. I call it the corporate come-on. The Halifax and Woolwich building societies are masters at it. At the end of the fixed rate period, they write to the borrower and offer him a further fixed rate deal rather than transferring to the penal standard variable rate. That seems extremely helpful to most borrowers, particularly when 400 they are told that they will not have to pay the redemption penalty that would have applied if they had switched to a different lender. So there is no £5,000 penalty charge, or at least not up front.
The lender kindly offers to roll that on top of the mortgage, so there is no shock to the borrower's financial system. It is a marvellous double whammy, for not only does the lender keep the business locked in for another five years but he charges the premium as if the borrower had left him and ensures that the borrower pays interest on it for the remainder of the mortgage term. As if that were not enough, the lender can offer the same come-on in two years' time when the next fixed rate expires. It appears that in the mortgage game, loyalty rarely pays.
That is what happened to Helen and Andrew Bradshaw. After two years at a fixed rate of 5 per cent., Northern Rock offered them another fixed rate deal at 8.5 per cent. That was in November 1998, when most rates were about 7 to 7.5 per cent. The Bradshaws knew that they would be better off remortgaging with another lender, but thought that they could not afford the £800 premium that they would have to pay. Remortgaging would have saved them £70 to £80 a month, but they did not have the capital to pay the £800 in one go. Of course, they could have rolled that sum up with a new mortgage and been better off. They did not realise that Northern Rock would do that anyway by imposing a redemption charge on their existing deal.
Northern Rock had also insisted that the Bradshaws take out their own Northern Rock home insurance policy. They thought that £600 was expensive for what was after all a modest home, but Northern Rock insisted. What the Bradshaws did not realise was that the following year the policy premium would increase by 20 per cent, to £720, despite their having made no claims. This bundling of other products in with the mortgage is another rip-off. It is a way of concealing the real cost of a mortgage. I am delighted that the Government have announced that they will legislate against such insurance bundling. They cannot do it soon enough.
The calculation of interest annually rather than daily or monthly is another hidden way for lenders to boost their coffers at the home owner's expense. On a mortgage of £150,000 with a rate of 7.5 per cent, over a 25-year mortgage term, the home owner will be charged an extra £3,870 if interest calculations are reviewed annually rather than monthly. The windfall to the lender is even greater if the same home owner pays off a lump sum of £10,000 at the start of the loan. If the interest is calculated on an annual rather than a daily basis, the home owner will pay an extra £48,700 over the 25-year period. Those costs may be hidden, but they are frighteningly real, and I urge the Government to take clear and effective action to stamp out such abuses.
Another similar abuse is when lenders cut savings rates two or three weeks before they cut their mortgage rates, or when the Bank of England base rate rises and they raise their mortgage rates a few weeks before they adjust their savings rates. The strange thing is that they manage never to get it the other way round, even though they claim that this is not a scam. In the last quarter of 1998, the clearing banks—Barclays, HSBC, Lloyds TSB and NatWest—are estimated to have netted a cool £40 million by operating that scam. Regulation should ensure that saving and borrowing rates are changed simultaneously.
401 I now come to regulation. Many lenders who have contacted me this week have urged that the Government should regulate the mortgage product more thoroughly. Others have urged the Government to regulate more thoroughly the advice given to the home buyer. It is my view that the Government must do both.
The House is aware that discussions have taken place today with Treasury Ministers about the most appropriate way to regulate the mortgage industry. I urge the Government to place the industry within the remit of the Financial Services Authority. Those of us who sat for long months on the Committee considering the Financial Services and Markets Bill are keenly aware that the rationale that lay behind the FSA was to create a single regulator to act as a one-stop shop for the public on financial services. That rationale will have failed if the largest financial contract that most people undertake in their lives remains outside the FSA's remit.
The FSA should become the regulator, and it should urgently review not just the contractual terms of mortgage products to ensure that they are fair and transparent, but the structure of selling these products. When I walk into a car showroom, I do not meet an automobile adviser: I meet a car salesman. When I walk into a department store, I do not meet a soft furnishings adviser: I meet a sales assistant. Why, then, when I walk into the Halifax, Abbey National, the Woolwich, Barclays or NatWest am I suddenly confronted not by a mortgage salesperson but by a mortgage adviser?
That person is not there as my agent, working to secure the best deal available for me. That person is not going to examine my financial position carefully before telling me that, sadly, the company has no suitable product, but, should I care to walk down the road, company Y will no doubt be able to help me. That person is there to maximise his or her company's profit. That person knows that the mortgage that may be better for me may not produce the same commission. How else can we explain the fact that one in three mortgages sold is still sold on an endowment basis?
All mortgage salespeople should be obliged to state clearly that they are not bound to act in clients' best interests, and that their obligation is to their companies— companies that may not even have the product that is most appropriate to a client's needs. They should be obliged to draw attention to the range of products that they do not stock, but that may be available elsewhere. That might introduce some fairness and transparency to the business of selling such an important and onerous contract. It might also draw customers' attention to the fact that there are genuinely independent financial advisers who can provide unbiased advice to help them through the mortgage maze.
I hope that my hon. Friend the Minister will be able to reassure me that regulation of both product and advice will soon be a reality under the Financial Services Authority.
§ The Minister for Competition and Consumer Affairs (Dr. Kim Howells)My hon. Friend the Member for Brent, North (Mr. Gardiner) has raised an issue that is vital to many people, and he has done so with great panache and clarity. He has done us all a service because, 402 as he said, the decision to take out a mortgage is one of the biggest decisions that an individual consumer makes. It is also a very personal decision: the object is usually to buy one's home or to make improvements to it.
As my hon. Friend pointed out, people taking out mortgages can be in a very vulnerable position. They are often under both time pressures and economic pressures in their keenness to acquire a new home, and they may make hurried decisions without studying all the small print. I do not think that I have ever studied the small print of any loan that I have taken out; it is often difficult to do so in the prevailing circumstances.
The Government are very concerned about the problems that some consumers have encountered with their mortgages—my hon. Friend listed some of them. As he said, my colleagues in the Treasury are considering whether mortgage advice should be regulated by the Financial Services Authority, and I understand that they will announce the results of their deliberations shortly.
My Department has responsibility for consumer protection issues, so we are also taking action on this important matter. Last year, my right hon. Friend the Secretary of State for Trade and Industry met the Council of Mortgage Lenders, major lenders, regulators and consumer groups to discuss mortgage problems. He asked the industry to consider what it could do to address the problems; he also said that he was prepared to use his legislative powers if necessary.
One of the major issues mentioned by my hon. Friend is unfair contract terms, and the question of what is unfair. All businesses—and mortgage lenders are no exception— should deal fairly and equitably with consumers. They should use contracts written in plain language that the average consumer can readily understand. Contracts should also clearly set out all the terms that apply, so that the consumer is not faced with a nasty surprise if, for example, he wants or needs to redeem a mortgage early. The examples that my hon. Friend gave were vivid and very common. The use of legalistic jargon and incomprehensible terms can deprive consumers of their legitimate rights, or, worse, make many consumers feel, mistakenly, that they have no rights at all.
The Office of Fair Trading has recently taken action under the Unfair Terms in Consumer Contracts Regulations 1999 against redemption charges. Such charges are justifiable for some types of mortgage, but the Government have been disturbed to learn of the level of the penalties that some people have been quoted—my hon. Friend mentioned some—to redeem their mortgages. I am also concerned about the complex formulae that some lenders have used to calculate the redemption charge. It is unreasonable to expect ordinary consumers to be able to understand how the formulae will operate if they want to redeem their mortgages, especially as few house buyers will be thinking about the consequences of early redemption when they take out their mortgages.
One of the more extreme examples of such formulae prompted the OFT to contact the lender, using its powers under the regulations. Following the OFT's intervention, the lender concerned—it was NatWest, which received quite a bit of publicity—agreed to cap its redemption charges for fixed-rate mortgages at no more than 5 per cent, of the sum redeemed where the original loan was for five years or less. For loans of five years or more, the cap is 7 per cent. However, those charges are significantly 403 smaller than what would have been charged using the original redemption formula. I am pleased that the OFT action has resulted in a fairer deal. Where the lender intends to impose a redemption charge, it is crucial that consumers are told about that up front and transparently. I am glad that my hon. Friend emphasised the importance of that initial transparency. In the current market, where many mortgages are redeemed early, consumers need that information to be sure that a mortgage will provide a good deal, both when it is taken out and in the future.
My right hon. Friend the Secretary of State raised redemption penalties at the mortgage summit that he organised. Lenders have agreed either to quote cash figures for redemption charges in the initial mortgage information or, where that is not possible, to impose a cash cap. That undertaking will ensure that consumers should have a clearer idea of the consequences of early redemption before they choose a mortgage and can take that factor into account when they decide which mortgage is best for them.
My hon. Friend dealt briefly with another important issue: the annual percentage rate and the way in which it is advertised. It is one of the main hooks that cause people either to take mortgages or loans, or to reject them. I am sure that he will recall that, last November, the Government laid regulations that will make it easier for consumers to compare mortgage deals. From April, all lenders will have to use a standard method for calculating APR. They will no longer be able to advertise a mortgage with a low introductory rate—that is the hook—on the misleading basis that that low rate will last throughout the entire period of the loan.
The new regulations will require lenders to take into account the fact that, once the low rate period has ended, the interest rate will change to the lender's standard variable rate. Consumers will be able to feel confident that the advertised APR gives a better reflection of the true cost of the loan throughout the lifetime of that loan. That is an important advance.
My hon. Friend also dealt with the matter of annual versus monthly interest, which is a very important consideration. Many lenders are still using annual interest systems to credit mortgage repayments—so that the outstanding balance on a mortgage is adjusted only once a year, regardless of when repayments are made or their amount. Compared with an equivalent mortgage that charges interest on a daily or monthly basis, a consumer who is charged on an annual interest basis may expect to pay substantial additional interest during the life of the loan. It was another subject that my right hon. Friend the Secretary of State raised at the mortgage summit.
Our new APR regulations take account of whatever system the lender uses, so that consumers are able to see which deal is cheapest overall. However, many new entrants to the mortgage market make a virtue of the fact that they do not use annual interest rates. We should like established lenders to move away from that practice, both for new and existing customers. Some of the biggest lenders have already said that, this year, they will be updating their systems. However, even when there will be 404 some delay before they are able to change their systems, we believe that lenders should be looking to give full and immediate value for overpayments as quickly as possible.
My hon. Friend also mentioned the tying-in of insurance, which is a worrying trend. Some consumers who want to get the best mortgage deal from a particular lender have to buy tied home or other insurance—a practice that I have encountered in dealing with another aspect of my portfolio, the travel industry. Many people who want to obtain good package travel or holiday deal are expected to buy insurance that is often delivered at sky-high prices.
In the mortgage market, the price of compulsory insurance does not have to be competitive because the borrower cannot shop around for the best deal. Currently, it seems that relatively few lenders require the purchase of tied insurance, but we are concerned that the practice could become more widespread. My right hon. Friend the Secretary of State recently announced that legislation will be introduced at the earliest possible opportunity to make it illegal to force consumers to take out certain insurance policies linked to a mortgage. We intend to publish a consultation paper on the matter in the spring, and legislation will follow.
I am sure that my hon. Friend will be aware that there have been regulations protecting consumers against unfair terms since 1994. However, in October 1999 the Government changed the law to enable more organisations to take action against businesses that use unfair terms in their standard contracts with consumers. I was very keen on that initiative.
Since the beginning of October, the Consumers Association—which is one of the named organisations— the statutory industry regulators and local authority trading standards officers—who are the stalwarts of consumer protection—have had the power to apply for court injunctions to prevent the continued use of unfair contract terms. It is a very important initiative, and the Consumers Association has not only signed up to it, but is very keen to be seen as the sponsoring agency in relation to the mortgage sector.
I expect formal court action to be very rare. The vast majority of complaints that the OFT has investigated since the regulations came into force have resulted in a negotiated change to the unfair term. I fully expect—and would encourage—the process of resolution to be by informal means, rather than by court action. As my hon. Friend said, much will depend on the action of the FSA.
The mortgage summit held at the DTI has demonstrated a willingness by the Government, lenders and consumer groups to address those major mortgage problems. Ministers and officials will be holding further meetings in the near future to ensure that they are overcome. I wholeheartedly support the work currently being done to remove unfair terms from mortgage contracts.
I thank my hon. Friend for raising the issue—on which, although we are making progress, much is left to be done. There are very good lenders out there, offering very good products and very good services, and those best examples must be replicated everywhere possible.
Question put and agreed to.
Adjourned accordingly at Twelve midnight.