A significant High Court ruling means the Financial Services Ombudsman (FSO) must reconsider a couple's complaint that Danske Bank was not entitled to increase to 4 per cent the variable interest rate on their mortgages at the same time the European Central Bank interest rate was falling to almost zero.
Kenneth and Donna Millar claimed the rate hikes occurred from 2011 despite the ECB rate falling dramatically in the same period and this amounted to breach of their mortgage contracts and also contradicted statements on the bank's own website.
Upholding their appeal against the Ombudsman's rejection of their complaint, Mr Justice Gerard Hogan found "serious and significant" error in how the Ombudsman had interpreted a key clause in contract documents concerning the bank's entitlement to increase the variable interest rate payable on the mortgage accounts.
He directed the Ombudsman to reconsider the complaint in a manner “not inconsistent” with the court’s findings.
The case arose after the Millars entered from 2005 into seven mortgage loan agreements with Danske's predecessor, National Irish Bank, for their family home and a number of residential investment properties. The interest rate applying to the loans, which are not in arrears, was a standard variable rate.
The Millars accepted their mortgages were not “tracker” mortgages but argued, given the terms of the mortgage deeds and other evidence, Danske acted wrongly in increasing interest rates at a time interest rates generally have fallen to historically low levels.
The dispute centred on a particular clause - Clause 3 - in the mortgage agreements which stated “rates of interest are altered in response to market conditions and may change at any time without prior notice and with immediate effect”.
The couple argued the bank is only entitled to amend or alter the rate of interest “in line with the general market interest rates”. They also relied on other bank documents including a March 2009 explanatory note for customers on the Bank’s website which stated: “..the interest rate you pay on a National Irish Bank variable rate home loan changes in line with any fluctuations in general interest rates. When interest rates go down your monthly payments do likewise. However, when interest rates rise, your monthly payments will increase too...”
In dismissing their complaint, the Ombudsman found Danske’s obligation under the agreements was to alter the rate in response to “market conditions” and the bank was not obliged to disclose the basis on which its assessment was calculated.
Mr Justice Hogan said this case involved straightforward application of ordinary principles of contract law governing construction of contractual documents and it would be inappropriate for the court to defer to the Ombudsman on these issues.
In construing Clause 3, the key words were “in response to market conditions” and the Ombudsman erred in finding Clause 3 was “clear in its wording”, the judge found.
Clause 3 was “ambiguous” and its meaning must be decided by reference to the general factual background against which the contract was entered into, he said. The Ombudsman was obliged to examine the question from a slightly wider perspective including a possible claim of collateral contract arising from the definition of variable rate mortgage on Danske’s website.
Without seeing the specifics of the case, Karl Deeter of Irish Mortgage Brokers said it was unclear where the case would go from here, but much would depend on if the couple had certain covenants within the loan offers about how the pricing was to work.
If their loans were tied to standard variable rate products, it is not obvious what they can do to counteract bank policy on rates, he said.
Mr Deeter said it was notable the court did not find the bank to be in breach of contract.
While there are no accurate figures on the number of variable rate mortgage holders in the Republic, analysts suggest they account for about 30 per cent of the mortgage market, which corresponds to about 207,000 mortgages.
