How the banks could land £1bn bill

BRITAIN'S biggest mortgage banks could face a compensation bill of more than £1bn after a watchdog's crucial ruling. The Financial Ombudsman has decided that HSBC acted unfairly by linking a customer's mortgage to the higher of two standard variable rates - and forced the bank to pay compensation.

It is now thought that the ruling could provoke mass claims against rivals Abbey National, Halifax and Nationwide, all of which also have two ' standard' rates.

Between them, the trio - Britain's biggest lenders - have 1.35m customers who could be in line for compensation if the Financial Ombudsman draws the same conclusion about their cases as he has done at HSBC.

Leading financial analysts asked by Financial Mail to calculate the potential bill facing the big three lenders say that it could be £1.2bn.

The calculations take into account average loan sizes, estimates of the periods to which compensation could apply and the wide variety of mortgage deals that could be affected. Halifax, the bank with the largest potential exposure, could be forced to repay £800m interest.

Last Tuesday's ruling concerned HSBC's controversial introduction of a second standard variable rate in July last year. HSBC's new rate, which was lower than its existing standard rate, was denied to 40,000 established borrowers with discounted loans.

It was on this point that HSBC has come unstuck - the ombudsman said the new, lower rate should have been used as the benchmark for the established borrower who challenged the bank's action.

HSBC has told borrowers in similar situations that they can complain individually to the Ombudsman. But even if bad publicity forces the bank to change its policy, analysts say it will escape lightly compared with Abbey National, Halifax and Nationwide, where lending is a core business.

Martin Cross of stockbroker Teather & Greenwood said: 'If the consumer lobby causes enough of a stink, HSBC may pay up. Halifax or Abbey would be very opposed. The costs there would be too significant.'

Nationwide, Abbey and Halifax await rulings from the Ombudsman on a small number of complaints. In the case of Halifax, he has already made a preliminary ruling in favour of one customer.