OFT investigation found use of "charging orders" to secure debt "unfair and oppressive"
The Office of Fair Trading (OFT) has ordered Royal Bank of Scotland and its subsidiary Natwest to stop using “charging orders” against customers' homes to collect relatively small debts.
The OFT said the lender had obtained charging orders from the courts to recover debts, often less than £5,000, even when the debt was linked to a credit card or loan.
Restrictions have now been imposed on Royal Bank of Scotland and NatWest, both members of the largely state-owned RBS Group, on how they enforce debt repayment.
Obtaining a charging order meant the debt to the lender would have to be paid from the proceeds of a home sale, though a separate order is needed to to force a debtor to sell their home to repay a debt.
A charging order places a 'charge' on a debtor's property, turning unpaid, unsecured judgment debts into secured debts, meaning the debt must be paid back out of the available proceeds of sale when the debtor sells the property.
The OFT said a bank or other creditor which has obtained a charging order can also apply to the court for an order requiring the property to be sold, but this happens “only in a minority of cases”.
An OFT investigation found there was an “apparent failure by the banks to consider customers' financial circumstances and the proportionality of the approach before asking the court to put a charging order in place.”
A statement from the OFT adds: “For example, the OFT found evidence that the banks were not always taking account of customers' efforts to repay debts using a debt repayment plan or other method, and that many charging orders were used to secure relatively small amounts of debt, sometimes below £5,000.”
David Fisher, director of consumer credit at the OFT, said: “Lenders are entitled to use charging orders, but they must do so proportionately and not to secure relatively small amounts of debt.
“Where we consider the use of charging orders to be unfair or oppressive, we will take action to protect consumers.”
RBS said in a statement: "We are committed to helping customers who find themselves in financial difficulty.
“We changed the thresholds for using charging orders ourselves in 2008.
“The cases reviewed by the OFT preceded these changes. We use charging orders only as a last resort.”
An investigation by the OFT back in 2008 revealed four different lenders – Alliance and Leicester Personal Finance; American Express Services Europe; HFC Bank, part of the HSBC Group; and Welcome Financial Services, part of Cattles – had told customers to secure non-mortgage debts against their homes using “oppressive and misleading” paperwork.
In that investigation, the OFT uncovered instances of charging orders being used to secure debts of less than £600.