Mortgage lenders who substantially increase exit fees between agreeing the contract term and the consumer exiting the mortgage are acting unfairly, according to the Financial Services Authority (FSA).
The regulator says it is concerned lenders are acting unfairly when they agree an exit fee of £100 at the start of the mortgage but increase it to £300 when the customer actually exits.
The FSA does not have an absolute scale showing what is fair and unfair but says it will reach a conclusion in each individual case.
Robin Gordon-Walker, press officer at the FSA, says, “It is not the absolute value but the variation which is unfair”.
Gordon-Walker says if the consumer and lender bilaterally agree a variation in the exit fee this is “no problem”; the FSA is concerned with lenders who unilaterally change the exit fee.
The FSA will look at the lender’s reasons for the exit fee increase and “the increase in paperwork or legal work may be a valid reason,” says Gordon-Walker.
The regulator has recently “found eight or nine firms whose contract term was unfair, which have varied or changed the term as a result,” he adds.
However, Sue Anderson at the Council of Mortgage Lenders (CML) says altering exit fees is something lenders are permitted to do because it says in the contract the fees are subject to change.
She says: “Mortgages are a long-term product and the scale of the difference is not that surprising.”
Anderson does not believe there should be limits on increasing exit fees because “the market is very competitive”.
“Even if customers incur a higher exit fee, they have probably benefited along the line from a good headline rate,” she adds.
But Jonathan Cornell, technical director of Hampton’s International Mortgages, questions whether significant increases in exit fees are proportional.
He says the issue “crops up under Treating Customers Fairly. It is like changing the terms of a contract half way through which seems unfair.”
Cornell believes the increase in exit fees has a dual purpose: “Firstly, to stop re-mortgaging and, secondly, because of an acceptance that clients will re-mortgage so why not get some money on their way out?”
Nick Baxter, managing director of Mortgage Promotions, agrees exit fees exist to lock customers in.
“Lenders have always tried to retain their customers but they are not good at it. They do not establish a one-to-one relationship so they have to prevent them moving away through exit charges,” he adds.
He warns lenders: “If exit fees are too large they risk falling foul of the Office of Fair Trading rules on terms and conditions. The FSA is not the only organisation they need to be aware of.”
Ray Boulger, senior technical director at Charcol, says the FSA’s rules on exit fees are two-fold: “One, there is a relationship to the costs the fees are meant to cover and, two, there is a relationship to what others provide.”
He points out the second rule is not relevant because if lenders put there fees up and other lenders catch up the increase in fees will be never-ending.
Boulger says: “Lenders should be required in the Key Facts Illustration to state what the exit fee is and commit to charging it if borrowers leave early”.
Fees should be transparent so people can make a judgment on whether they wish to enter the mortgage, he adds.
Joe Wiggins, a spokesman for Abbey, defends the increase in exit fees saying: “The reason we have exit fees is to cover the cost of administration and work that goes into transferring mortgages”.
Wiggins adds: “We make sure fees accurately reflect the cost incurred by the bank”.
Sometimes Abbey needs to review exit fees but Wiggins says they work out whether they are fair and look at the industry as a benchmark.
He adds, “Fairness is an important part of our fees. We would not introduce a fee that is unfair in the first place – we would do a cost analysis.”
Sally Lauder, press manager at Alliance & Leicester, says: “We have not been contacted by the FSA with regards to discussing this matter with them.
“We fully comply with all the mortgage regulatory requirements and we believe that the framework the regulators have put in place is entirely fair.
“Naturally if our regulatory requirements change at any time, we’ll obviously review our procedures to maintain compliance.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7968 4554 or email [email protected].IFAonline
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