Mortgages: Halifax snafu to cost Lloyds dear
When LloydsTSB, as it was, was half-strong-armed and half-suckered into into taking over what was once the UK's mightiest mortgage lender, it did not know that the deal would almost sink what had been the UK's most stable high-street bank. Nor did it know what lay beneath the surface. The bugs are coming out of the woodwork and they are expensive.
When Halifax capped its Standard Variable Rate for borrowers, the flocked to the deal in droves - some 600,000 of them. But when the bank changed the cap from 2% over BLR to 3% above BLR and then started charging the higher rate, it failed to inform affected customers. Interestingly, it did this in October 2008 when it was up to its armpits in bad debt - and just weeks before its parent, HBOS (which comprises both Halifax and Bank of Scotland) fell into a black hole, only to be dug out by Gordon Brown and the then LloydsTSB boss Victor Blank. The deal was put together one evening. The regulatory hurdles were ridden over roughshod, the EU competition rules were side-swiped and due diligence was skimped. See story
That failure to check that the increase in the rates, just six weeks before the takeover, is to cost Lloyds Banking Group, as it is now known, an estimated GBP500 million.
As many as half the borrowers under the scheme have been overcharged.
Lloyds has decided that it's too complicated to work out who has been overcharged and by how much. So it has decided to make what it terms a "goodwill payment" of GBP250 if they were warned of the rate change. But for those who were not told, their accounts will be checked, a calculation made and the actual amount of overcharging refunded.
But there is an irony: in May last year, as LloydsTSB saw its profits under pressure because of a guarantee given during the financial crisis that it would cap its standard variable rate at a maximum of 2% above BLR, it decided that it could not afford to keep lending at that rate. Existing borrowers continued to keep that guarantee - but new borrowers had a cap of 3.99% above BLR.
That policy at Halifax would have saved its new owners from a massive provision in its 2010 accounts and a public embarrassment, to say nothing of attention from the regulators.
As for the due diligence? Well, someone in internal audit wasn't doing their job and nor were those charged with checking out the company - but equally nor were those who failed to secure a guarantee from the government (which under Brown created and had no qualms about placing demands on the FSA) that LloydsTSB would be immune from regulatory action and penalties in relation to buried messes at HBOS.
That guarantee should have been taken or LloydsTSB should have walked. A little too much focus on the upside and not enough on the downside, perhaps?
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