Ombudsman in landmark ruling against HSBC

Up to a million homebuyers could be in line for compensation following a landmark financial ombudsman ruling against "two-tier" mortgage rates.

The decision could land home loan companies with a billion-pound bill.

The financial ombudsman service threw out an appeal from HSBC against a preliminary adjudication. This ruled against the two-tier standard variable interest rate system - where customers with discount deals, capped loans and those locked in after fixed rates had expired paid more than customers who were free to remortgage. The gap between the two could be as much as 1%.

The test case involves one customer with a large mortgage. The ombudsman's ruling is thought to have cost the bank nearly £18,000 for the one case, while the decision will open the floodgates for other homebuyers to complain first to lenders and ultimately to the ombudsman.

Most big mortgage companies including Halifax, Abbey National, Nationwide and Northern Rock introduced two-tier structures. Most of these, including market leader Halifax, are awaiting appeals against pro-consumer ombudsman rulings.

No lender has disclosed how many homebuyers have been forced to stay on higher rates, but estimates point to nearly 1m. If each received just £1,000 in compensation, the home loan industry would face a £1bn bill.

Lenders have argued that borrowers cannot have it two ways - they cannot expect cheap deals and then lower variable interest rates once those deals have expired. They have said their profitability would be hard hit if forced to put all customers on to a lower rate.

LloydsTSB home loan offshoot C&G has already withdrawn lower rates from customers after an ombudsman ruling in September.

But the FOS decided on contractual law, where there are two "standard variable rates" instead of one, the interpretation must be in favour of the lower rate for customers.

Last night David Mills, the HSBC personal banking general manager, said: "This ombudsman decision is unfair. It stifles innovation and creativity in the UK banking industry. And it acts to the detriment of customers. We shall abide by this ruling. But we do not see it creating a precedent as all cases are different."