Irish ruling on FSPO decision is ‘significant’ for financial institutions

In a case between Ulster Bank and the FSPO (27-page / 339KB PDF), the bank appealed an FSPO decision involving two sets of the bank’s customers who had drawn down mortgage loans on tracker interest rates and then chose to switch their mortgages to a different non-tracker rate. Ulster Bank refused to return them to the original tracker rates and the customers complained to the FSPO, arguing that they had a contractual entitlement to the original tracker rate for the life of the loan. 

The FSPO reached two decisions relating to this matter which became the subject of the bank’s appeal. The FSPO found the bank’s conduct was contrary to law because the customers had a contractual entitlement to return to their original tracker rate at any time during the life of the loan. This finding was based on the FSPO’s interpretation of the mortgage contracts.

The FSPO also found the bank’s conduct was “otherwise improper”. This decision was based on the FSPO’s finding that the customers did not receive sufficient notice or explanation of the consequences of moving from one type of interest rate to another.

Ulster Bank appealed the FSPO decision to the High Court, which upheld the FSPO decision. The bank then appealed the High Court decision to the Court of Appeal. The Court of Appeal overturned the High Court’s decision and rejected the FSPO’s interpretation that the customers had a contractual right to return to their original tracker rate.

The Court of Appeal found that the High Court had afforded excessive deference to the FSPO’s interpretation of the mortgage contracts. In the court’s view, once the complainants agreed to vary their mortgage contracts and move to a preferential staff rate, there was no provision in the new mortgage contract reserving their right to return to the original tracker rate for the remainder of the mortgage.

The Court of Appeal then turned to the FSPO’s finding that the bank’s conduct was “otherwise improper” by failing to warn the customers of the impact of switching their rate. This assessment was based on the specific knowledge which the complainants had at the time they switched rates. The court rejected the idea that the specific knowledge of parties could be effectively determined by the FSPO without an oral hearing. The matter was remitted back to the FSPO to hear from the complainants orally before it makes a decision in relation to the conduct of Ulster Bank.

Lisa Carty of Pinsent Masons in Dublin said the Court of Appeal’s decision was a “significant ruling for financial institutions”.

“This is a strong statement that the courts will reach their own conclusion regarding the proper interpretation of a contract and will not defer to any legal interpretation by the FSPO in this regard,” she said.

“While the facts of each case and the terms and conditions of each customer will be highly relevant, this decision will be broadly welcomed by regulated firms as a commercially sensible decision that does not require firms to retain historic tracker rates on their books long after customers have chosen to vary their contracts and move away from those rates,” said Carty.

A similar issue involving tracker rates which previously arose during the Central Bank’s wider tracker mortgage examination, which concluded in 2019. Here, the Central Bank criticised banks for their failure to warn customers that switching from a tracker rate to a more favourable fixed rate would result in them losing their tracker rate.

Carty said: “There has been debate regarding the ability of banks and customers to contract out of a rate which is promised ‘for the life of the loan’, and the type of information required to constitute satisfactory warning to customers who did make that change to their contract.”

“[This case] is a timely revisiting of some of the issues which will be of particular interest to financial institutions who may have previously set up redress programmes on the basis of ‘failure to warn’ issues.”

According to Carty, the Court of Appeal’s ruling could also result in a change in the conduct of FSPO cases in the future, with a greater emphasis on seeking oral evidence from complainants as to their knowledge and understanding of the matters complained of.

She said: “This development follows a recent trend in increased scrutiny by the Irish courts of administrative sanctions regimes and an increase in constitutional and procedural safeguards being imposed on decision making bodies. This trend is positive as it is important that firms which are subject to regulatory enforcement have the benefit of procedural fairness at all stages of the process.”