The Financial Services and Pensions Ombudsman (FSPO) made “serious errors” in three decisions last year that found Ulster Bank customers were entitled to tracker compensation, senior counsel for the lender told the High Court on Tuesday.
Eoin McCullough, SC, for the bank, told the court that the three cases are part of a “significant group” of borrowers in similar circumstances who were excluded from redress in an industry-wide examination overseen by the Central Bank between late 2015 and mid-2019, in which more than 40,000 cases of overcharging were identified.
Ulster Bank said in its annual report for 2021 that the outcome of the challenges on the specific cases “is uncertain but may be material” for the lender. Ulster Bank is currently in the process of exiting the market.
While the ombudsman issued binding decisions that customers in each of the three cases had an “enduring contractual entitlement” to a tracker rate after periods on fixed-rate loans, Mr McCullough said that this was not backed up by the loan contracts into which the borrowers had entered.
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Mr McCullough said the “chaos of the FSPO’s approach to contracts” at the centre of the case would suggest that borrowers “have an enduring entitlement to every interest rate that they were ever on”.
The first case — the main focus of Tuesday’s hearing presided over by Ms Justice Marguerite Bolger — relates to borrowers who took out a mortgage in April 2004 that initially had a one-year reduced interest rate, before reverting to Ulster Bank’s so-called home loan rate, a standard variable product.
The borrowers, whom the court has decided cannot be identified in reports, signed a so-called flexible mortgage transfer form in early 2006, entitling them to move on to a tracker loan, set at a 1.55 percentage point margin over the European Central Bank (ECB) rate, Mr McCullough said.
The borrowers applied in May 2007, as ECB rates were rising, to fix their interest rates until August 2010. The relating loan documents said that Ulster Bank may offer to extend the fixed period at the end of the fixed term or offer alternative available products. However, if these were not accepted, the contract stated that the borrowers would automatically revert to the bank’s home loan rate, Mr McCullough said.
The borrowers ended up moving automatically to the home loan rate, as they did not avail of the alternatives. Ulster Bank stopped offering tracker products in October 2008 as the funding costs of banks soared during the financial crisis. The ombudsman last year directed, however, after assessing a complaint from the borrowers, that Ulster Bank put them back a tracker rate as of August 2010 and pay redress, according to Mr McCullough.
Legal challenge
Ulster Bank launched a legal challenge against the ombudsman’s decision — and those relating to two similar cases — last year.
The second case relates to a mortgage involving an Ulster Bank staff member that started off on a tracker rate. The customers opted in 2007 to move as much of the loan as possible, amounting to over €90,000, on to Ulster Bank’s preferential staff rate, which was set at 3 per cent a year, fixed for the term of the loan.
The borrowers decided in December 2010 that they wanted to transfer that facility to a tracker rate, as ECB rates were falling at the time. Ulster Bank said at the time that it was not in a position to do that, the court heard. The FSPO decided last year, however, that these borrowers also had an “enduring contractual entitlement” to a tracker loan.
The general outline of the third case is broadly similar to the first. However, the court heard that the FSPO did not allow enough time between issuing a preliminary decision and making final binding decision. The FSPO should allow parties 15 working days to consider a preliminary decision, according to its website.
As such, FSPO and Ulster Bank have agreed that the final decision in this case should be quashed, pending an official ruling from the court.
Mr McCullough said that the FSPO rejected the central argument of the borrowers in the first case that the default home loan rate should have been a tracker rate — as they knew when starting off on this product that it referred to a standard variable rate. However, the ombudsman still concluded that they had an ongoing entitlement to a tracker rate, which is something that the borrowers never asserted, he said.
He also noted that FSPO decisions at issue were the opposite to conclusions made by its predecessor organisation, the Financial Services Ombudsman, in favour of Ulster Bank on cases with similar circumstances.
The case is scheduled to continue for a number of days, with counsel for the FSPO expected to start making its response on Thursday.
