Ombudsman's ruling flouted by Skipton

THE BUILDING SOCIETIES Ombudsman has upped the stakes in his battle to force Skipton Building Society to pay compensation to homeowners after finding compelling evidence of mortgage mis-selling.

Brian Murphy, the ombudsman, has made a near-unprecedented use of his powers to force Skipton into a public reprimand, demanding it publish details of his findings in national newspapers.

The use of the power - not employed since the late 1980s - followed Skipton's rejection of a decision he made ordering the society to pay compensation to the people he said were unfairly treated.

Mr Murphy yesterday sent a letter to all chief executives of building societies, later passed by industry sources to The Independent , saying that Skipton had decided to reject the ruling, enduring the publicity "as an alternative to complying with my decisions".

The ruling found that Skipton had marketed a commercial mortgage to an unnamed firm of financial advisers with a rate of "1 per cent over base rates". The actual rate later varied between 1 and 4 per cent over base rates.

Mr Murphy ordered the society to repay the difference between 1 per cent over base rates and the actual rate, fix it at that rate in future, and pay pounds 500 in compensation to each customer affected.

The letter to chief executives underlines Mr Murphy's anger at the ability of mortgage lenders to by-pass the formal complaints scheme. While Skipton later settled with its customers, they were left with no bargaining power because his ruling no longer counted.

"I had reached the decision after a very full investigation... I took the view there was compelling evidence the society had mis-sold a mortgage to the complainants and that the society had treated them unfairly."

The ombudsman's action adds fuel to an ongoing debate over whether mortgages should be regulated on a statutory footing. Under current rules, mortgage providers can reject what the ombudsman says - even when he concludes that mis-selling has taken place and orders compensation to be paid.

Instead, they can simply reject the ombudsman's rulings and opt for the "publicity option" requiring them to take out national newspaper advertisements. Customers then have no way to ensure their complaint is satisfied except to go to court.

John Dawson, secretary and general manager of the Skipton, said: "We are disappointed in that we didn't know this letter was being circulated. We have resolved the matter with our customers and they are still customers."

In Skipton's view, the "1 per cent above base" was not meant to indicate a rate for the lifetime of the mortgage. The society says it was not contractually bound to stick to the rate and the customers were not mis-led.

The Government has warned mortgage lenders they will be regulated by legal statute unless they can show they are capable of regulating themselves.

Lenders claim they have raised standards of practice through the employment of a voluntary Mortgage Code. However, investigations by the Consumers Association and Suffolk Trading Standards authority have suggested the quality of financial advice is patchy.

Sophie Gumpel, head of money research at Which?, the Consumers Associations magazine, said: "We don't think the mortgage code has made much of an impact on mortgage advice. If we don't see an improvement, we think mortgages should be regulated."