Judge queries bank’s stance on mortgage rate hikes

The Financial Services Ombudsman has been told by the High Court to look again at Danske Bank’s decision to hike its variable interest mortgage rates to more than 4% when ECB rates had plunged to almost zero.

The ombudsman had thrown out a complaint by a couple in north Dublin that the bank had acted wrongly in increasing interest rates on six buy-to-let investment mortgages and the couple’s family home mortgage at a time when rates had fallen to historically low levels.

Mr Justice Gerard Hogan yesterday ruled as ambiguous a clause in Danske Bank’s terms and conditions which stated that rates of interest would be altered in response to market conditions.

The judge said Kenneth and Donna Millar, of Strand Rd, Portmarnock, Dublin, have seven mortgage accounts with Danske, all of which were being serviced and none of which was in arrears.

Their complaint related to the manner in which Danske purported to increase the rate under the terms and conditions that applied to the mortgages, and the ombudsman had found the bank had acted in accordance with those conditions.

Judge Hogan said interest rates had fallen since the onset of the global financial crisis in 2008, save for a brief period in 2011 when interest rates had twice been raised by the ECB.

This decline in interest rates had been especially marked within the eurozone since the latter months of 2011 as the future of the currency had seemed in doubt.

He said the gist of the complaint by the Millars, who had represented themselves in court, was that the bank had allowed its variable interest rate to increase as rates within the eurozone had fallen dramatically.

In November 2011, Danske had increased its rate by almost 1%, and since then, that rate had remained at just over 4%. In the meantime, the ECB rate had plunged to almost zero.

The Millars had complained about the increase, but Danske had defended its decision to raise its rate on the basis that, as it did not receive any ECB funding, the ECB’s rate cuts were irrelevant to the bank.

In December 2013, the ombudsman had rejected the couple’s complaint on the basis that the bank’s only obligation was to alter the rate in response to “market conditions” and not “in line with general market interest rates”.

Judge Hogan said the resolution of the issue before the court once again raised the fundamental question of what the true role of the ombudsman was and if the court should defer to the ombudsman on the question of contract law.

He said that it was never the intention of the Oireachtas that a complainant should be disadvantaged by electing to make a complaint to the ombudsman rather than by proceeding in the ordinary courts.

It would be inappropriate for the court to defer to the ombudsman on the issues of contract law and only interfere if the interpretation of the contract was somehow unreasonable or irrational.

He said that Mr Justice Barr in 1994 had forcefully made the point that statutory interpretation was solely a matter for the courts and no other body had authority to usurp the power of the court in performing that function.

Judge Hogan said the ombudsman erred in concluding that the words “in response to market conditions” were clear when they were not and the ombudsman’s decision could not be allowed to stand.

He set aside the decision and remitted the matter to the ombudsman for a fresh determination of the complaint “in a manner not inconsistent with this judgment”.


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