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Northern Rock's blunder leaves £270m bill for UK taxpayer

AN administrative blunder by the state-owned part of collapsed bank Northern Rock will cost the taxpayer £270m, it emerged last night.

Queues outside a Newcastle branch of Northern Rock

AN administrative blunder by the state-owned part of collapsed bank Northern Rock will cost the taxpayer £270m, it emerged last night.

Some 152,000 customers of Newcastle-based Northern Rock Asset Management (NRAM) will receive compensation of £1,775 each after inaccurate paperwork was sent to regulated loan borrowers dating back to 2008.

Speaking at Treasury questions yesterday, Chancellor George Osborne revealed customers with loans below £25,000 were affected and blamed “an error originating in 2008 when Northern Rock was in public ownership”.

The error saw loan statements sent to customers which did not clearly spell out how much they originally borrowed.

The Treasury said these letters were not compliant with the strict wording set out in the Consumer Credit Act (CCA), which states that letters were supposed to contain three figures – the original amount borrowed, the opening balance and the closing balance.

Even though it appears no customers lost out due to the oversight, the £270m bill is the amount of interest paid by people during from October 2008 when the law changed.

It was unearthed by UK Asset Resolution (UKAR), which now owns NRAM, which said the £270m will be paid back to customers from its profits.

Tim Newman from UKAR said: “We are a business that generates surplus funds and, in this instance, we have enough profit generated this year that can be used to pay back £270m, and we’re still expected to post profits after that.”

He added: “This won’t affect our customers or the fundamentals of the business.”

UKAR undertook an internal investigation and consulted legal counsel, the Financial Services Authority, the Office of Fair Trading, UK Financial Investments and the Treasury.

The Treasury added that it had no objections to UKAR’s proposed approach of refunding customers.

However, Treasury economic secretary Sajid Javid said in a statement to Parliament that the refund is likely to increase public sector net borrowing for 2012/2013.

Newcastle North MP Catherine McKinnell last night criticised the Chancellor for the delay in revealing the mistake, which Government knew about two months ago.

Ms McKinnell, who is also Labour’s Shadow Exchequer Secretary to the Treasury, said: “The Government knew about this £270m liability as far back as October, yet it wasn’t mentioned in the Autumn Statement’s borrowing figures. People will be very worried to think that the Chancellor is playing smoke and mirrors with the country’s finances.”

NRAM bosses made assurances the remediation was not expected to delay the timing of the repayment of the firm’s Government funding, which stood at £19.6bn in June this year.

But the money set aside to deal with the mistake could have potentially gone towards paying taxpayers back ahead of schedule.

As the blunder happened not long after Northern Rock was nationalised, but before it split into two, many senior staff are no longer with the firm.

NRAM confirmed no one has been held accountable for the multimillion-pound mistake.

“The problem originated after the bank was nationalised but before it was split into two organisations, so a lot of the senior management of the former Northern Rock have since departed – it’s a different set of people,” said Mr Newman.

The UKAR board has now asked Deloitte to conduct an independent inquiry and to make recommendations on avoiding similar pitfalls in future.

Affected customers will be contacted in writing by UKAR in the next few days.

It is expected that most customers will be reimbursed largely through lower borrowing costs on existing loans.

UKAR chief executive Richard Banks 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.”

 

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