A blunder in the wording of loan statements by the nationalised part of Northern Rock will cost the taxpayer £270m as customers are refunded an average of £1,775 for the error.
Up to 152,000 customers stand to receive the windfall – largely through lower borrowing costs on existing loans – which will increase the government's debt this year.
The problems took place at Northern Rock Asset Management (NRAM), the part of Northern Rock that remains nationalised.
Loan statements sent to customers failed to include the original amount which had been borrowed. The oversight was uncovered by the new state-owned body, UK Asset Resolution (UKAR), which now owns NRAM and the nationalised mortgages of Bradford & Bingley.
The Treasury, which is picking up the bill for the long-standing error, said letters sent to customers were not compliant with wording set out in the Consumer Credit Act (CCA), which requires such letters to contain three amounts: the original sum borrowed, the opening balance and the closing balance. The NRAM letters did not include the first number.
The £270m figure covers the amount of interest paid by customers during the period from October 2009 when the changes to the law came into effect.
Sajid Javid, the economic secretary to the Treasury, said in a written ministerial statement. "In selected letters and customer account statements, certain paragraphs of mandatory wording were written incorrectly and compulsory information about the amount of credit was not included in the statements. The CCA provides that a lender is restricted in how it can enforce a debt and borrowers are not liable for interest, over the period during which the lender has not provided the specified information."
While customers had not lost out financially, they would be provided with "restitution" because of mistakes in the letters. Unsecured loans of £25,000 or less are covered by the CCA and some of the problems occurred on the unsecured part of the Together mortgages sold by the bank.
Richard Banks, the chief executive of UKAR, said: "We will be writing to all customers who are affected and advising them on next steps. We have not received any complaints or claims as a result of this matter and as far as we are aware it has not resulted in financial loss for customers."
UKAR, which informed the Treasury of its fears about the mistakes in October, has hired accountants from Deloitte to investigate what went wrong and make recommendations to ensure similar errors do not happen again. The problem was uncovered by a junior member of staff earlier in the year and banks urged customers not to deploy the services of the claims management companies which are contacting customers over payment protection insurance compensation.
The Office for National Statistics included UKAR in the public sector net borrowing figures for 2012-13 announced by the chancellor George Osborne in last week's autumn statement when he said it would add £70bn to the deficit. Javid confirmed that the £270m remediation figure was not included in that forecast.
"The impact of these costs on the public finances is a decision for the independent Office for National Statistics. This is likely to increase public sector net borrowing in 2012-13," Javid said. "However, it remains the case that borrowing will continue to fall in that year."
The problem occurred after the bank was nationalised in February 2008 and before it was split into "good" and "bad" banks in 2009. The "good" part of the Newcastle-based lender was sold to Sir Richard Branson's Virgin Money a year ago
All the senior management of the former Northern Rock have since departed; at the time the bank was chaired by Ron Sandler, with Gary Hoffman as chief executive.
