FSA is too woolly when it comes to exit fees

After lenders\' exit fees getting a bashing in the media over the past couple of years, the Financial Services Authority has finally decided to give its input. But is it too little, too late?

This month the regulator issued a briefing note on exit fees following its announcement last September that it was looking into the charges after some people had argued the rises were unfair.

And there’s certainly been a massive hike in the fees over the years – well ahead of inflation. For example, despite the furore, the Royal Bank of Scotland group recently said that for several of its mortgage providers including First Active and Tesco Mortgages, exit fees would rise from 195 to 225.

What makes this all the more annoying for borrowers is that the cost of administering mortgages has fallen for lenders, due to advances in technology.

It’s not just the level of the fees that’s unfair but also the lack of transparency. As it stands, most lenders can increase their fees on a whim during the course of a mortgage.

What the FSA has come out with so far seems rather woolly but at least it has singled out the way lenders use their discretion to change fees as a question of concern.

Although the FSA makes it clear it does not set prices for financial products and firms can vary what they charge for services, their contracts must comply with the Unfair Terms in Consumer Contracts Regulations 1999 and with general law.

And the regulator refers to its May 2005 statement of good practice on fairness of terms in consumer contracts which states that clauses should only be changed if valid reasons are specified.

The FSA has gone so far as to say that some mortgage contracts are not clear when it comes to explaining which costs could be charged to customers and has asked lenders to give evidence of how they reach decisions to prove they are fair.

I doubt many lenders will put their hands up and admit to being unfair, so surely it would be better to ask intermediaries and their clients if the fees being charged are justifiable.

It seems unlikely that many lenders will be able to explain how massive hikes in exit fees are justified when compared with the exit costs they incur.

Surely the last thing someone needs if they default on their mortgage is yet another bill to pay. And exit fees can also be used as a sneaky way to recoup money lost from enticing new business with tempting upfront deals.

A final thought – where do exit fees fit in with the FSA’s Treating Customers Fairly initiative?

We’re unlikely to be any more clear on the exit fees issue before the autumn. By then lenders will have responded in a bid to pacify the regulator’s concerns.