Such an accounting method in today’s technological and consumer-orientated world is outrageous, but this is nothing new. I first became involved in the debate back in 1991. At the time I was in charge of the mortgage division of a big lender’s subsidiary.
The subsidiary charged interest on a mon-thly basis. Our main product was a flexible mortgage and we couldn’t see how it would work on an annual rest basis.
So we gained a competitive advantage by promoting the benefits of monthly rests to our business partners. Yes, I know daily rests are ex- pected nowadays but back then monthly rests were ground-breaking.
Eventually, our mortgage portfolio was scheduled to be transferred onto the parent firm’s computer for cost reasons. You would not believe the rows I had after I was told the product had to adopt an annual rest basis. Maybe that’s why I’m self-employed now.
Even then I thought the approach was backward-looking but the IT department whined about how it would be impossible to change the main system.
I’m enraged that more than 17 years later lenders are still ripping consumers off by accepting this accounting approach as standard. The cost of changing from annual to daily rests is likely to be 0.1% but 0.1% on the interest rate is significant.
Maybe headline rates do not look so good when accounting systems are factored into the payments.
If you read any industry magazine at the moment, you’d think it was only brokers who have failed to embrace the Financial Services Authority’s Treating Customers Fairly initiative, but lenders are liable too. So what’s the FSA doing about annual rests?
The regulator will come to realise that commercial pressure delivers change as surely as rules and enforcement initiatives.
Lenders will only change their unfair behaviour if and when they can’t get away with it any longer.
That pressure will come when brokers and consumers vote with their feet and walk away, when lenders face action from disgruntled consumers or when the Office of Fair Trading acts under its unfair terms in consumer contract regulations.
It’s going to be an interesting argument. Nearly two decades’ notice should have been more than enough to sort out legacy computer systems. Lenders will have to think of a better excuse if they are to continue ripping their customers off.