It was announced yesterday (see here) that Lloyds Bank, the lucky owner of HBOS (Halifax Bank of Scotland), will have to pay around £500million to HBOS customers who took out a particular type of loan. The long and short of it is that customers were told they would be given notice if HBOS changed its policy from charging a maximum of 2% above base rate to charging 3% above base rate. The policy was changed, as they were probably entitled to do, but notice was not given to all customers who were told they would be given notice. Nonetheless, 3% above base rate was charged. Lloyds has agreed to compensate those who paid the additional 1% but were not given notice.
On the face of it the position is very straightforward. Whether or not customers would have sought a replacement loan on being informed of the change, they would have had the opportunity to do so. As it is they were deprived of that opportunity. Had they been given notice it seems fair to presume that some would have found another lender and ended up paying less than the amount they paid Lloyds, some would have found another lender and ended up paying more than to Lloyds, some would have switched to a different type of loan with Lloyds and some would have just left the original loan in place and paid the extra interest. There is no way of knowing how many would have fallen into each category although it is probably not unrealistic to suggest that most would have left things as they were and just paid the higher interest charge. After all, base rate had fallen substantially and 3% above base was less than many had been paying a year before when the mark-up was 2%.
If this were looked at as a claim for breach of contract the assessment of compensation would be fiendishly difficult. Leaving aside the question whether there was any breach of contract, compensation would have to be calculated by trying to value the loss of opportunity to switch mortgage from Lloyds to another lender or from one Lloyds mortgage product to another. The position would be different for different borrowers, depending on their own financial circumstances and the degree to which they would have been likely to seek out an alternative loan. Few would have been entitled to repayment of the whole of the additional 1% they paid although it is theoretically possible that a very small number would have been able to prove a case for a larger sum (if they were able to satisfy the court they would have switched to a loan charging less than 2% over base).
Reports say up to 300,000 HBOS customers were affected. It would make no sense (except to the bank managers of the lawyers involved) to have 300,000 separate claims. Were this dealt with by way of claims for breach of contract there would be only one claim in which all customers who showed interest would be involved. "Class actions", as these cases are known, are relatively new beasts to the English judicial process, we see them most often when a large number of people suffer personal injuries due to the same cause - perhaps a drug that proves to have bad side effects or a work practice that causes many employees to suffer illness or injury. Although the accuracy of the compensation in each individual case is somewhat rough and ready the process is generally quicker, certainly much cheaper and has the added advantage of everyone knowing their case has been considered in the same way as everyone else's.
The intervention of regulators of businesses such as banking means that legal claims do not always need to be made, the regulator can step in and require redress to be paid for an apparent wrongdoing. This, of course, is what happened in the present case. We will probably never know how much pressure was applied by the regulator and how much the decision to offer compensation was motivated by either a genuine sense of the need to do the right thing or exasperation at Lloyds with the shabby practices of HBOS and it does not really matter. A problem was identified, a solution worked out and litigation avoided.
At the heart of the solution is the implicit assumption that HBOS/Lloyds should not have charged an extra 1% interest without giving notice to their customers. Whether they were entitled to do so in law is not the point, they said they would give notice and they did not; of itself that is bad practice and, some would say, fundamentally unfair. The amount they received from customers by increasing their margin seems to have been around £500million. They simply should not have received that sum in the first place. Had they followed good practice they would have received the money and would not now be liable to repay it, as it is they should not have received it and now must repay it.
In making the repayments Lloyds will not be losing anything they will simply be handing back money they should not have received. It is quite wrong to think of this as a loss. Any loss is purely hypothetical and results from not giving the promised notice - had it been given they would have received £500million, by not giving it they have lost £500million, except they haven't. By not giving notice they lost the chance of receiving up to £500million but they did not lose any money. By not investing one pound on the numbers 6, 16, 26, 32, 33, 34 and 46 for last Saturday's lottery you lost £4million - that is not a loss it is a failure to make a profit that would have ensued from doing something other than what you actually did.
On the face of it the position is very straightforward. Whether or not customers would have sought a replacement loan on being informed of the change, they would have had the opportunity to do so. As it is they were deprived of that opportunity. Had they been given notice it seems fair to presume that some would have found another lender and ended up paying less than the amount they paid Lloyds, some would have found another lender and ended up paying more than to Lloyds, some would have switched to a different type of loan with Lloyds and some would have just left the original loan in place and paid the extra interest. There is no way of knowing how many would have fallen into each category although it is probably not unrealistic to suggest that most would have left things as they were and just paid the higher interest charge. After all, base rate had fallen substantially and 3% above base was less than many had been paying a year before when the mark-up was 2%.
If this were looked at as a claim for breach of contract the assessment of compensation would be fiendishly difficult. Leaving aside the question whether there was any breach of contract, compensation would have to be calculated by trying to value the loss of opportunity to switch mortgage from Lloyds to another lender or from one Lloyds mortgage product to another. The position would be different for different borrowers, depending on their own financial circumstances and the degree to which they would have been likely to seek out an alternative loan. Few would have been entitled to repayment of the whole of the additional 1% they paid although it is theoretically possible that a very small number would have been able to prove a case for a larger sum (if they were able to satisfy the court they would have switched to a loan charging less than 2% over base).
Reports say up to 300,000 HBOS customers were affected. It would make no sense (except to the bank managers of the lawyers involved) to have 300,000 separate claims. Were this dealt with by way of claims for breach of contract there would be only one claim in which all customers who showed interest would be involved. "Class actions", as these cases are known, are relatively new beasts to the English judicial process, we see them most often when a large number of people suffer personal injuries due to the same cause - perhaps a drug that proves to have bad side effects or a work practice that causes many employees to suffer illness or injury. Although the accuracy of the compensation in each individual case is somewhat rough and ready the process is generally quicker, certainly much cheaper and has the added advantage of everyone knowing their case has been considered in the same way as everyone else's.
The intervention of regulators of businesses such as banking means that legal claims do not always need to be made, the regulator can step in and require redress to be paid for an apparent wrongdoing. This, of course, is what happened in the present case. We will probably never know how much pressure was applied by the regulator and how much the decision to offer compensation was motivated by either a genuine sense of the need to do the right thing or exasperation at Lloyds with the shabby practices of HBOS and it does not really matter. A problem was identified, a solution worked out and litigation avoided.
At the heart of the solution is the implicit assumption that HBOS/Lloyds should not have charged an extra 1% interest without giving notice to their customers. Whether they were entitled to do so in law is not the point, they said they would give notice and they did not; of itself that is bad practice and, some would say, fundamentally unfair. The amount they received from customers by increasing their margin seems to have been around £500million. They simply should not have received that sum in the first place. Had they followed good practice they would have received the money and would not now be liable to repay it, as it is they should not have received it and now must repay it.
In making the repayments Lloyds will not be losing anything they will simply be handing back money they should not have received. It is quite wrong to think of this as a loss. Any loss is purely hypothetical and results from not giving the promised notice - had it been given they would have received £500million, by not giving it they have lost £500million, except they haven't. By not giving notice they lost the chance of receiving up to £500million but they did not lose any money. By not investing one pound on the numbers 6, 16, 26, 32, 33, 34 and 46 for last Saturday's lottery you lost £4million - that is not a loss it is a failure to make a profit that would have ensued from doing something other than what you actually did.
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6 comments:
"It is theoretically possible that a very small number would have been able to prove a case for a larger sum (if they were able to satisfy the court they would have switched to a loan charging less than 2% over base)."
But even if somebody can prove he could have got a mortgage for 1.5% over base, Lloyds would surely not be liable for that additional 0.5% because of the duty on the claimant to mitigate losses? Such a claimant chose to continue paying (what he thought was) 2%, so the other 0.5% is his problem.
Ah, Mr Wadsworth, you're assuming the borrower was aware of the change of cap from 2% to 3% above base.
Had he been aware of this but did not switch lender, he could not blame the failure to switch on HBOS's failure to give notice of something he knew about anyway.
If, however, he was not aware of the change of cap but would have switched had he been made aware of it by notice from HBOS, the failure to switch is caused by the breach as is the over-payment.
Unless someone is aware of the facts that constitute a breach of contract (whether or not he realises it is, in law, a breach of contract) he cannot know that someone else's act is causing him to incur expense he could avoid. Mitigation of loss can only come into play once one is aware that loss is occuring.
Having said that, your point illustrates how difficult it would be to mount a claim. Anyone who keeps a close eye on his finances and has the ability to switch would surely do so when the cash he pays each month increases above what other lenders would charge. That he does not do so makes it difficult for him to establish he would have done so had HBOS told him the interest rate cap was rising.
FB,
I am a simple non-lawyer, so this might be a naive question. If the regulator had not ruled on this matter but instead it went before a court, how would the court rule?
Would the court award all of the extra interest charged or only some of it?
You mention 300,000 individual lawsuits, F.B.
Is there an equivalent to the U.S. class-action lawsuit in the British legal system?
(I hope not. In the US, the lawyers would have received two-thirds of the money plus expenses and the 300,000 plaintiffs would divvy up what was left. That, and the defendent company and the lawyers would agree to a lesser amount just to get the whole thing over and done with. It's a racket, if you haven't already noticed.)
We certainly do have class action lawsuits Mr R, but lawyers here are not entitled to claim a percentage of the damages. Our fees are fixed as a cash sum and are subject to being reduced by the court if challenged (we have specialist Costs Judges who deal with disputes about legal fees).
There was once a system by which a success fee could be claimed (as a percentage of the agreed fee rather than a percentage of the damages awarded) but I believe this has recently been outlawed. I can't be sure about the outlawing because it is not something I have ever been involved in and I am going by hazy memory alone.
Thank you, Sir.
I was wondering why the lawyers weren't jumping all over that case as they would have done in the U.S. (We call it, "Jackpot Justice.")
As near as I can make out, the British class action suits would seem to pay at the same rate as any other case; no "Jackpot" available.
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