Taxpayers are to fund a £270m “Christmas bonus” for about 152,000 customers of Northern Rock because of a blunder in which they were not given the right information about their outstanding loans.
Customers will be refunded an average of £1,770 and the state must foot the bill because the mistake was made by the so-called “bad bank” still owned by the Government. The “good” part was sold to Sir Richard Branson’s Virgin Money last year.
The compensation bill will increase public borrowing in the current financial year and was not included in the figures announced by George Osborne in his autumn statement last week. Luckily for the Chancellor, the setback does not alter his surprise announcement that borrowing will fall this year, which wrong-footed Labour.
After Northern Rock was nationalised in 2008 at the start of the financial crisis, the Consumer Credit Act, which covers unsecured loans under £25,000, was changed to ensure that borrowers were informed of three figures in loan statements — the original sum borrowed, the opening balance and the closing balance. Northern Rock Asset Management (NRAM) did not include the original sum.
Although customers did not lose money as a result, they are entitled to a windfall because they were not properly informed under the Act. Most of those affected used a “Together” scheme combining a mortgage and a loan.
Lord Oakeshott, the Liberal Democrats’ former Treasury spokesman, said last night: “Every taxpayer is being stung for £10 because of gross negligence by the Treasury and UKFI [the body which holds the Government’s stake in bailed out banks]. No one was overcharged but they were fast asleep so we must all pay out. Their arrogance and incompetence was a toxic mix and they couldn’t run a whelk stall. This is a classic example of nationalising the banks’ losses and privatising the profits. Richard Branson won’t be paying out.”
Ministers pointed the finger at the regulatory regime introduced by the previous Labour Government, saying the mistake was another sign of the problems exposed by the financial crisis. The Treasury is not aware of the blunder being repeated by other banks but an independent inquiry will be conducted by the consultants Deloitte into how it happened and what lessons can be learned.
Brooks Newmark, a Conservative MP, told the Commons: “This is yet another example where the previous Government's total failure to regulate the banking system properly has cost this country dearly.”
Mr Osborne told MPs: “Some customers with certain types of mainly unsecured personal loans were not given all the mandatory information in their statements which they were entitled to by law. As a result, interest payments on these loans are not legally enforceable.”
Ed Balls, the shadow Chancellor, accused Mr Osborne of trying to “slip out” the news during Commons questions rather than making a proper statement ”to avoid any proper scrutiny or questioning“ from MPs.
Sajid Javid, the Economic Secretary to the Treasury, said in a written Commons statement that refunds would be paid into customers' accounts. “Where redress is required, this will be made by correcting a customer's account balance to reverse the consequences of them being charged any interest over the period in which the documentation is non-compliant,” he said. “There is no need for customers to take any action at this time.”
The problem was discovered by UK Asset Resolution (UKAR), a new public body which owns NRAM and the nationalised mortgages of Bradford & Bingley.
Richard Banks, UKAR’s chief executive, said: “NRAM is acting in accordance with its legal responsibilities and we are determined to do the right thing for customers and the taxpayer. We will be writing to all customers who are affected and advising them on next steps. We have not received any complaints or claims as a result of this matter and as far as we are aware, it has not resulted in financial loss for customers.”