Irish Life and Permanent Plc v Financial Services Ombudsman and Others

• Jurisdiction: Ireland
• Judge: Mr. Justice Hogan
• Judgment Date: 03 August 2012
• Neutral Citation: [2012] IEHC 367
• Court: High Court
• Docket Number: [2011 No. 264 MCA]
• Date: 03 August 2012

IN THE MATTER OF THE CENTRAL BANK ACT 1942 (AS AMENDED) AND,

IN THE MATTER OF PART VIIB THEREOF, AND

IN THE MATTER OF AN APPEAL PURSUANT TO SECTION 57CL THEREOF

BETWEEN

IRISH LIFE AND PERMANENT PLC (trading as PERMANENT TSB)

APPELLANT

AND

FINANCIAL SERVICES OMBUDSMAN

RESPONDENT

AND

CHRISTY THOMAS AND JOSEPH THOMAS

NOTICE PARTIES

(TOGETHER WITH THREE OTHER RELATED STATUTORY APPEALS INVOLVING PAT AND MARY FOLEY, DEREK HEALY AND JOANNA HEALY AND DAMIEN LAVERY AND LINDA LAVERY-WHELAN RESPECTIVELY AS NOTICE PARTIES)

[2012] IEHC 367

[2011 No. 264 MCA]

THE HIGH COURT

Mortgage - Fixed-interest tracker mortgage - Variable interest rate - Duties of bank when giving advice - Improper conduct - "Break fee" - Central Bank Act 1942

Facts: The appellant bank had provided mortgage advice to the four notice parties to this action. All of the parties were customers of the respondent and had transferred from a fixed-interest tracker mortgages to variable interest rates but were unable to switch back when their original fixed rate period had expired. All of the parties claim that this was on foot of poor advice from the appellant.

Held by Hogan J, that each of the notice parties' cases would be considered in turn. The first notice party had made enquiries from the appellant Bank's call centre of a more attractive interest rate. On foot of this advice, they requested the transfer to a variable interest rate which was subsequently accepted. On complaint to the respondent, it was held that the appellant should have advised that they would not be able to switch back to the fixed-interest tracker mortgages at a later date and by failing to do so, their conduct was improper pursuant to s. 57Cl (2)(g) of the Central Bank Act 1942 ("s 57Cl"). The Court considered that the appeal would be dismissed in so far as the complaint of inadequate advice, but allowed in relation to a "break fee".

The second notice party had transferred their interest rate as above. It was the policy of the appellant to charge a "break fee" for this type of transfer but this was not applied in this case apparently because of a systems malfunction. The respondent ruled that the failure of the appellant to apply their policy here was disingenuous as it encouraged the notice party into the transfer who then lost their right to revert. The appellant had therefore acted unreasonable and unjustly under s 57Cl.The third notice party had also transferred their interest rate in the same way and been affected by the "break fee" issue. The complaint was upheld pursuant to s. 57Cl(2).

The Court considered that the conclusions of the respondent for the second and third notice parties were not supported by evidence. The conduct of the appellant had not been disingenuous in the light of their evidence and accordingly the appeal would be allowed.

The fourth notice party transferred their interest rate but unlike the other three appeals, they had paid a redemption fee for doing so. The respondent found that the party had not been properly advised before making the transfer. The Court considered in this case that retail customers could not be expected to grasp fine points of law relating to fiduciaries, and the fourth notice party had relied on the advice provided on the basis it was full. Accordingly, the respondent was entitled to find that the appellant had failed in their duty and so their conduct was "otherwise improper".

The first notice party's appeal was equally based (and accepted by the respondent) on the "break fee" and insufficient advice complaints. Held by Hogan J that the respondent's decision should be affirmed but only on the basis of the insufficient advice complaint.

Mr. Justice Hogan

JUDGMENT of Mr. Justice Hogan delivered on the 3rd August, 2012

1 What are the duties of a Bank towards a customer who seeks advice in relation to a mortgage product? This is one of the fundamental issues which are presented by a series of four appeals brought to this Court by the appellant, Irish Life and Permanent plc ("ILP") against decisions of the Financial Services Ombudsman. Before considering these broader questions, it is necessary to set out the background to the various appeals, each of which present a slightly different factual background, but all of which raise broadly similar legal issues.

2 Before proceeding any further, I should record at the outset that I am customer of the appellant Bank, a fact which I disclosed to the parties at the outset of the hearing once this appeal was assigned to me. Neither party objected to my hearing these appeals and, on that basis and in the light, therefore, of that express and mutual waiver of any objection, I agreed to hear and determine it.

3 1 propose to outline the background facts of each of the appeals before then to examine the legal issues which arise. All of the appeals arise from events which took place mainly in 2009 and 2010 where many customers of the ILP first switched out of fixed-interest tracker mortgages (i.e., a mortgage interest rate tracking or following the European Central Bank refinancing rate) to variable interest rates, but then subsequently found that when the original fixed period had expired, they could not elect to switch back to tracker mortgages. This is a common feature of these appeals, as the customers in question maintained in their complaints that they were either poorly advised by ILP or that by maintaining a studied silence, ILP tacitly encouraged them to break the tracker rate contract.

4 It should be said that these tracker rates were originally offered in a completely different financial era, prior to the onset of the financial turmoil and banking crisis which beset the country in late 2008 and the subsequent emergence of the Eurozone debt crisis. The latter has meant that tracker mortgages interest rates are at record lows (and thus very advantageous for customers), while the Bank's costs of funds has risen. Virtually all tracker mortgages are currently loss-making and the product has since been withdrawn from the market.

5 A further consideration is that a computer failure in early 2009 meant that many ILP customers were- from the Bank's perspective- wrongly allowed to switch from fixed to variable interest rates without financial penalty. This also is a key factual background to three of the four appeals. By this stage the ECB had lowered interest rates in response to the financial crisis and many mortgage holders were examining ways of exiting fixed rates agreements in order to avail of the lower interest rates being charged to variable interest rate customers. It appears that many consumer websites were highlighting the fact that ILP were permitting customers to switch without penalty and the number of customers seeking to avail of this option rose sharply during this period of January and February 2009 until the Bank could satisfactorily address this problem. While ILP honoured the no penalty quotations, the uncontradicted evidence before me was that this computer error was extremely costly for ILP - with a net loss of over €33m.-and that ILP suspended switching in February 2009 when the problem was discovered until it could be rectified.

6 While the facts of the individual appeals vary as to their details, there are two key issues which required to be examined. First, what was the reason why ILP charged no redemption or break fee when permitting certain customers to switch from fixed to variable rates in the early part of 2009? This is a key feature in the Foley and Lavery Whelan appeals and, to a lesser extent, the Healy appeal. It does not feature at all in the Thomas appeal. Second, was ILP under a duty to inform the customers of the consequences of the break, namely, that they could not revert to the tracker mortgage at the conclusion of the original fixed rate term once that rate had been broken by opting for the variable rate?

7 I propose now to consider in detail the facts of each individual case before returning to consider some of the legal issues which arise.

The Healy Appeal

8 Mr. and Mrs. Healy took out a three year fixed residential investment loan in respect of an investment property in Galway City. The mortgage provided for interest only payments for the currency of a fixed term on a principal sum of €425,000.00 over a 25 year period at an interest rate of 4.99%. Condition 5 of the mortgage loan approval agreement stated:-

"On expiry of the fixed rate period and, where the applicant chooses the option of a tracker mortgage interest rate, appropriate to the balance outstanding on the loan at the expiry of the fixed rate period. In the absence of instructions from the applicant at the expiry of the fixed rate period, the interest rate for the loan will be the tracker mortgage rate applicable to the balance outstanding on the loan, at the expiry of the fixed rate period as may be varied in accordance with the variation to the European Central Bank refinancing rate."

9 Furthermore, the European standardised information sheet which accompanied the approval letter stated:-

"The interest rate is 4.99%: this rate is fixed for three years. At the end of the fixed period you may exercise an option to contract for another fixed rate period (if available) or to move to the standard variable rate or to a tracker mortgage rate. If a tracker mortgage rate is chosen the loan will become a tracker mortgage loan and the rate applicable will be the rate appropriate to the balance outstanding on the loan at the time of the expiry of the fixed rate period and may be varied in accordance with the variations to the ECB rate. The payment rates in this housing loan may be adjusted by the lender from time to time (applies at the standard variable rate or tracker rate as chosen).

The lock-in period for this product is a fixed term rate. However, this can be broken subject to the...