Taxpayer must pick up £260m bill for state-owned bank’s error, despite no one being out of pocket

Christmas has come early for more than 40,000 people who had a personal loan with Northern Rock after the high court ruled they are in line for windfalls averaging £6,000 each. They are set to be quids-in despite the fact that none of them are said to have lost out financially. And the taxpayer will be picking up the £261m bill.

Most, if not all, of those set to benefit took out Northern Rock’s now-notorious Together mortgage, which allowed people to borrow up to 125% of a property’s value.

However, they should not start mentally spending the money just yet because state-owned Northern Rock Asset Management (NRAM) is considering an appeal.

The 43,000 borrowers are entitled to the compensation because of a paperwork glitch that occurred while Northern Rock, which was nationalised in 2008, was in public ownership. They were not given all the information in their statements that they were entitled to under the Consumer Credit Act, which meant that, technically, interest payments on their loans were not legally enforceable. Borrowers are not liable for interest relating to a period when a lender has not provided the relevant information.

This problem first came to light in late 2012, when the government announced that 152,000 current and former Northern Rock borrowers would share £270m – working out at £1,775 per person – after officials spotted the error.

Most of these people had taken out the Together deal, which was a traditional mortgage with an unsecured personal loan bolted on, and was withdrawn from sale in 2008.

But a decision was taken to include only people with loans of less than £25,000. Since then, some of those who took out loans of between £25,000 and £30,000 have complained that they should be compensated too, despite NRAM saying that “none of these customers suffered financial detriment”.

NRAM believed these 43,000 borrowers were not covered by the Consumer Credit Act rules and therefore should not receive redress, but decided to take the case to the high court to get a conclusive answer. The court has now ruled that they should be compensated.

In a statement NRAM said it was taking legal advice on whether to appeal, but was setting aside £261m to cover the bill. This sum divided by 43,000 people averages out at £6,070 per person.

It is thought most of the affected borrowers are still paying off these loans and, assuming the ruling stands, they will not receive their windfall in the form of cash. Instead, their loan account balance will be “corrected” to reverse the consequences of them being charged interest during the period when the paperwork did not meet the legal requirements. It is likely their repayments will stay the same, which means they will pay off the loan earlier. Those people who have already paid off their loan would almost certainly get a cash refund.

Richard Banks, the chief executive of UK Asset Resolution (UKAR), the parent company of NRAM, said: “We are disappointed by the decision because no detriment has been suffered by customers.” He added: “Customers do not need to act at this stage. If any redress becomes due, we will write to all those affected to advise on next steps.”