FSA deems Chesham mortgage contract unfair
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The Financial Services Authority has deemed a number of terms in Chesham Building Society’s mortgage contract unfair and ordered the society to change them.
Today sees Chesham complete its merger with Skipton Building Society, which means Chesham will no longer offer new mortgages, but it will have to change its contract for existing customers.
The FSA found three terms in the society’s contract unfair.
The first was Chesham’s ability to change a borrower’s interest rate to the society’s SVR should any of their mortgage conditions not be met.
The FSA ruled that this was unfair because it did not consider the extent of the breach and it allowed the society to back-date the SVR payments to the start of the mortgage.
The FSA says the effect of this could have been to impose a disproportionately high sum on the consumer.
The second term that was highlighted as unfair was its ability to withdraw the offer at any time without giving notice.
The FSA believed this provided the society with too much discretion to withdraw a mortgage offer.
It said the power of the society to withdraw a mortgage offer due to “any question” or “any event” occurring since the mortgage offer was made may have been too broad.
In relation to existing customers Chesham has changed its contract so it will only withdraw the offer in specific cases.
Thirdly, the regulator found that the term in its contract that allowed it to demand full repayment of the mortgage should the property be let out even with consent was unfair.
The FSA says this allowed for the society to demand repayment even if they had consented to the property being let.
The society has changed its terms so it will not require immediate repayment if it has given consent for the property to be let.
A spokeswoman for Skipton says Chesham never had cause to enforce the terms in the contract but did change them once they were highlighted by the FSA.
She says: “Skipton does not have those terms in its mortgage contract, so no borrowers will be affected by them.”
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Readers' comments (1)
Glen McKeown | 2 Jun 2010 11:50 am
The FSA's decision on Chesham mortgage contracts superficially appears to be a reasonable attempt to protect mortgagees from unreasonable terms. The details given re-enforce first impressions, since those terms do appear to be unfair.
However, I can't help having bad feelings about the process as opposed to the content.
As laid out this is retrospective enforcement, that is they are changing existing contracts for the very woolly reason that a few people in the FSA "feel the terms are unfair". So the FSA have set the precedent (it was probably already set) that they can interfere with legal contracts whenever they "feel like it", and without due process of law.
There is a rule of law entitled "caveat emptor" that puts responsibility onto a purchaser to ensure they are satisfied with the contents of a contract. This concept is actually upheld in S.5(2.d) of FMSA 2000, but generally ignored by the FSA. The Act itself is more concerned with the FSA providing Guidance as the means of protecting the market rather than imposing retrospective judgements.
In law a party to a contract has the remedy of applying to court to have a contract, or a part of a contract, set aside if it's terms are considered to be unreasonable. In other words there is a process of rectification.
In the case of Chesham I believe a better process would have been for the FSA to outline what they believed to be unfair or unreasonable, and state that they would uphold any complaint brought by a mortgagee in respect of any of these terms.
This means that they are not changing a contact retrospectively, a process would be in place to deal with any complaint, and nothing need be done currently i.e. there are no unnecessary costs if Chesham do not activate any of the clauses and there are no complaints.
There are ways of achieving the desired effect that do not transgress the Rule of Law and are simple and cheap. Pity the FSA can only find the least appropriate method - this wouldn't have nothing to do with Power and Staff expansion would it?
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