Credit and loan agreement errors likely to trigger multimillion-pound payouts
Latest banking scandal centres on mistakes in paperwork for loans, hire purchase agreements, plus credit and store cards
The problem was uncovered in 2012 when 152,000 people with a Northern Rock loan were told they would receive a payout. Photo: Christopher Thomond for the Guardian
An epidemic of errors in credit and loan agreements is the latest expensive scandal to hit the banking sector, with the cost already approaching £1bn. HSBC disclosed on Monday that it is setting aside hundreds of millions of pounds to refund customers for mistakes made in paperwork.
How did the latest debacle occur? This affects some personal loans, credit and store cards, and hire purchase agreements. It has nothing to do with the payment protection insurance (PPI) scandal.
Many of Britain's banks and building societies have discovered that some of the annual statements, arrears notices and other correspondence sent to customers holding these products did not comply with the Consumer Credit Act because they did not give all the information that people were entitled to by law.
In many cases, the offending paperwork did not include the required statutory wording. Under the law, borrowers are not liable for interest or default charges relating to a period when a lender has not provided the information, even if the original documentation was fully above board.
Affected customers are entitled to a refund of the interest or fees they were charged over the period that the errors occurred. One common error is that loan statements failed to include the original amount borrowed. The act requires such statements to contain the sum borrowed, plus the opening and closing balance.
How did this come to light? In December 2012 it emerged that 152,000 people who have, or had, a personal loan from Northern Rock would each receive a windfall averaging £1,775 because of a paperwork glitch. The taxpayer picked up the £270m bill because the error happened when Northern Rock was in public ownership.
Which other banks are involved? In September 2013 it was disclosed that as many as 300,000 Barclays personal loan customers could be in line for refunds totalling about £100m. The Co-operative Bank made a similar announcement, though no figures were disclosed. Then, in March this year,the Office of Fair Trading announced that 17 unnamed banks and building societies had agreed to pay refunds averaging £300 per person to a total of 497,000 customers affected by this problem. Now HSBC has revealed it is putting aside $367m (£218m) to cover interest refunds to some of its unsecured loan customers. It added: "There is uncertainty as to whether other technical requirements of the [act] have been met, for which we have assessed the contingent liability at up to $1bn [£590m]."
How is this money being repaid? Some people will receive the refund in the form of a reduction in what they owe. Others – for example, those who have already paid off the loan or no longer have the card – are likely to receive a cheque.
What is the total bill for the industry? The running total at the moment is at least £740m – and that is only the amounts that have so far been disclosed. It has some way to go before it approaches the £24bn PPI bill. However, further announcements are expected.
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