An epidemic of errors in credit and loan agreements is the latest costly scandal to hit the banking sector, with the total bill already approaching the £1bn mark.
HSBC this week joined other banks in revealing it is setting aside hundreds of millions of pounds to refund many of its personal loan customers after uncovering errors in their paperwork. These mistakes mean that, effectively, the interest payments were legally unenforceable for a period.
Other financial institutions that have uncovered similar errors include Barclays, the Co-operative Bank and Northern Rock. There are more than a dozen others that have, so far, escaped being named.
Here we look at who is entitled to cash and what you have to do to get it.
Whats this all about? It concerns some personal loans, plus some credit and store cards and hire purchase agreements. It has nothing to do with the payment protection insurance mis-selling debacle.
It originally had all the hallmarks of an isolated and relatively minor glitch affecting just one bank: Northern Rock. But many of Britains banks and building societies have subsequently discovered that some of the annual statements and arrears notices sent to customers did not comply with the Consumer Credit Act because they did not give all the information people were entitled to by law.
Since October 2008, lenders have been required to include specific information and wording in the statements that they send to customers. However, it appears that some banks failed to update the wording of their letters to reflect these changes.
The total bill for all this stands at £850m, and is expected to rise.
What did they do (or not do)? In some cases, statements didnt include the original amount borrowed. Under the act, they have to contain the sum borrowed, plus the opening and closing balance. Other statements failed to include the necessary reminders about peoples rights when it comes to paying off the loan.
It might sound like a technicality, but under the law borrowers arent liable for interest or default charges relating to a period when a lender hasnt provided all the necessary information, even if the original documentation was fully above board. Affected customers are entitled to a refund of the interest or fees charged over the period that the errors occurred – which, in some cases, is several years.
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 revealed that as many as 300,000 Barclays personal loan customers could be in line for interest refunds totalling about £100m after the bank uncovered numerical errors on some statements.
The Co-operative Bank made a similar announcement, again involving personal loans. It set aside £110m.
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.
Whats happening with HSBC? The bank is putting aside around £220m to cover interest refunds to some of its personal loan customers – and has estimated the potential bill as up to £590m.
HSBC says that, in its case, the errors mainly involve annual statements sent out to personal loan customers, which omitted the necessary wording reminding people of their right to make an additional payment/overpayment.
It has not disclosed how many loans are affected, nor the period over which errors occurred. However, customers who have applied for an HSBC personal loan within the last 12 months arent affected, says a spokesman.
How do I know if Im affected? Youll have either received a letter, or youll be getting one. It is understood Barclays issued its refunds in around November last year. Meanwhile, HSBC indicated it will be writing to affected customers very soon. Customers do not need to do anything as they will be contacted by their bank, say the institutions.
Can I have the loan written off? For years, claims companies have promoted the idea you can have your loan written off on the grounds of paperwork errors, but its dubious as to how much this is true. The current refunds are, crucially, not about suggesting that the loans are unenforceable – rather that for a period of time, the interest on the loans was unenforceable. Also, in each case, the banks have been proactive so it makes no sense to use a claims company.
How is this money being repaid? Some people have received their refund in the form of a reduction in what they owe. In the case of Northern Rock, many customers had their loan account balance reduced. Similarly, Barclays rejigged peoples loans, resulting in them owing less. They carry on making the same monthly payment, which means their loan will be repaid earlier.
It is thought that some people who had already paid off their loan or no longer had the card, have received a cheque.
Has anyone lost money? Its not clear. In the case of Northern Rock, it was said that no one had lost out financially and no one had complained. HSBC says it has found no evidence that anyone suffered financial detriment, with no difference in the numbers of people making overpayments during the period, and it adds that it is not aware of any complaints.
Has there been mis-selling? The banks insist this is not a mis-selling issue; instead, they say, these are technical breaches, and that the original sales were all appropriate.