UK's biggest mortgage lender 'could be forced' to pass on interest rate cut to customers

Britain's biggest mortgage lender could be forced by the City watchdog to pass on this week's expected interest rate cut to more than half a million customers, it emerged today.

The Financial Services Authority may force Halifax to reduce its tracker mortgage rate in line with any fall in the Bank of England base rate, despite a clause in the loan stating that it does not have to do so.

Up to 600,000 people are thought to be on the Halifax tracker, which automatically moves up and down in line with the base rate.

But a clause in the mortgage's terms and conditions gives Halifax the option of not passing on any cut or only passing on some of it once the base rate falls below 3%.

However, Jon Pain, the FSA's retail markets manager, warned yesterday that these clauses would only be enforceable if they were included in the Key Facts Illustration given to borrowers when they arrange the loan.

He said: "Whilst tracker interest floors can be a legitimate term of a mortgage, this can only be if it is clear and unambiguous to the consumer and is consistently and prominently spelt out in the initial Key Facts Illustration and offer document throughout the sales process.

"If it is not, you run the real risk of both breaching our disclosure requirements and having an unfair contract term you can't enforce."

Halifax had removed the clause from its Key Facts Illustration in 2005, after being told by the FSA that the document was too long.

The document at the time ran into 11 pages, nearly double the FSA's recommended length of around five pages.

The clause was still included in the Mortgage Conditions document which goes out to borrowers with their offer letter.

A Halifax spokeswoman said: "We will make the decision on whether or not to exercise the option when rates do fall below 3%. We are noting the comments by the FSA and are looking into them."

An FSA spokeswoman said: "We do not comment on individual firms."

She added: "It cannot be right that to shorten your KFI you take out something which is required under FSA rules. It is a rule that a collar should be included in a lender's KFI."