FOS case study: Break costs

The Financial Ombudsman Scheme has published a case study
on its approach to the recovery of costs by a financial services provider (FSP) under a fixed interest rate loan to two borrowers where one borrower is removed.

Borrowers A and B entered into a fixed rate loan contract with their financial services provider (FSP). Their partnership came to an end and Borrower A wanted to be released from their obligations under the loan contract and any supporting mortgage but Borrower B wanted to stay on the same terms as the existing loan contract, and Borrower B was able to show they had capacity to service the loan contract without reliance upon any financial contribution from Borrower A.

The FSP treated Borrowers A and B’s request to release Borrower A as a termination of the existing loan contract with Borrowers A and B, and a request for a new loan contract with Borrower B only. Because it viewed the existing loan contract as being terminated, the FSP sought to charge break costs for early termination of the fixed rate loan from Borrowers A and B.

Resolution of complaint
The borrowers complained. FOS’s view was the break costs did not constitute a reasonable loss that the FSP would incur because:

•the FSP did not need to re-invest the loan monies
•the loan monies could remain lent on the same terms to Borrower B
•the FSP had a duty to mitigate its loss arising from the “termination” of the contract and this duty could be fulfilled by lending to Borrower B, and
•the FSP had an obligation to act fairly and reasonably in its dealings with Borrowers A and B.

FOS accepted that the FSP’s systems may not allow for a change of names of borrowers. However, FOS’s view was that this system limitation did not make any difference to what could fairly be charged to Borrowers A and B.

FOS said that if new documentation was required (such as a new mortgage in the name of Borrower B) the FSP was reasonably entitled to recover these costs as well as a reasonable charge for assessing serviceability by Borrower B.

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