Watchdogs will not bite

Some of the worst abuses highlighted by mortgage lenders in last week's Jobs & Money could be halted if the Consumers' Association or the Office of Fair Trading used their statutory powers.

The Unfair Terms in Consumer Contract Regulations should prevent lenders arbitrarily increasing rates charged to "locked in" borrowers.

In September the Consumers' Association will acquire the power to apply to the High Court for injunctions preventing businesses relying on unfair terms. The OFT has been able to do this since the regulations were introduced in 1995, but until this month had not actually sought a court order.

It has frequently been exhorted to act robustly against mortgage lenders, from among other places than these columns, but its reluctance to do so has cost borrowers hundreds of millions of pounds.

There were reports last weekend that the CA would be seeking an injunction against lenders as soon as it got the power to do so. If it succeeded, many borrowers could get substantial rebates before the end of the year.

However, the CA actually stated this week that it is currently "gathering in evidence of unfair contracts", and would not commit itself to action by a specific date. A spokeswoman said it was looking at all aspects of the personal finance industry rather than individual lenders, which may not bode well for quick action.

The regulations specifically give as an example of terms that should be regarded as unfair those which enable a supplier to alter the terms of a contract unilaterally without a valid reason. Changes in interest rates should be made only where the consumer is then free to terminate the contract immediately.

Strictly speaking, this means that any change in interest rates where the borrower is locked in is unfair. However, as this is given only as an example, the courts have a broad discretion to decide on fairness.

It is likely that they would be sympathetic to a lender who did no more than change interest rates in line with prevailing Bank of England rates. Introductory rates have been as low as 2% for the first year, and it would seem unfair on the lender if it could not recoup the loss on lending at that rate by tying the borrower to a standard rate mortgage for an agreed period afterwards. However, if the lender is allowed to increase rates arbitrarily, it effectively has a blank cheque to draw on the borrower's money.

People who borrow from a building society which demutualises are particularly vulnerable to this. Building societies, theoretically at least, act solely in their members' interests and have no interest in overcharging.

However, once an institution is owned by shareholders, profits, rather than fairly balancing the interests of borrowers and lenders, become paramount. Charts we published last week showed how the Halifax and Abbey National have widened the differential between lending rates and base rates.

While the CA or the OFT are procrastinating about testing these terms in the courts, borrowers may be able to take their own action if a lock in and increased rates have worked unfairly.

If a court did accept such an argument, the lender would have to provide a substantial rebate. The argument could found a claim in its own right or be raised by anyone facing a repossession action based on alleged arrears. If the rate had been increased during the period of a lock in, the arrears attributable to that would probably be disregarded.

Indeed, so damaging for the entire industry would an adverse court finding be on this point, it is highly unlikely that a commercial lender would want to risk arguing the point against an individual.

• Richard Colbey is a barrister.