Rock shareholders planning to sue

Customers queued to withdraw savings in September

Northern Rock's small shareholders could sue the government after their action group expressed "disgust" at compensation proposals.

The UK Shareholders' Association (UKSA) says that the value put on shares will be negligible as the valuation will not be fair, unbiased and independent.

But a Treasury spokesman said the valuers would be independent and be of "necessary professional standing".

Meanwhile, the bank has sent letters suggesting some borrowers go elsewhere.

'Grossly unethical'

The government wants to put the troubled bank into "temporary public ownership" in the coming days, which would lead to compensation for shareholders.

But the UKSA's Northern Rock Shareholders Action Group has hit out at the terms of reference to be used by an appointed valuer.

It claims that the terms require the valuer to assume that the bank is unable to continue as a going concern and is in administration.

Roger Lawson, the UKSA communications director, said that these terms were "grossly unethical" as the bank was operating as usual owing to the government loans.

"The government has mismanaged the crisis at Northern Rock, which eroded the foundations of the company," he added.

He said the group regarded the compensation proposals to be unfair and illegal and would pursue it subject to legal advice.

The group wanted to see a panel of four valuers, drawn from financial and legal experts.

A Treasury spokesman said the valuer, or group of valuers, would be completely independent and suitably qualified. It would be up to them to agree the level of compensation.

But he added that the taxpayer should not compensate shareholders of a business being propped up by public money, so the terms must state that the valuer assumed the bank was no longer a going concern.

'Look to rivals'

Meanwhile, letters have been sent to existing borrowers with Northern Rock telling them they could receive a better deal elsewhere when their current deal came to an end.

The government wants to nationalise Northern Rock by the end of the week

A Northern Rock spokeswoman said the move came after initial comments in September that it was planning to reduce its mortgage book.

Letters that previously outlined deals that the bank had on offer, now informs borrowers that they might get a cheaper deal at one of their rivals.

"This is a standard letter, in keeping with our declaration that we have taken prudent action to rein back on our lending," said the spokeswoman.

"We continue to provide mortgages but we believe that it is fair to point out to our customers that there are probably better deals available elsewhere."

Shrinking mortgage book

Experts have already spoken of how Northern Rock's mortgage book was being reduced well ahead of the move to public ownership.

Ray Boulger, from mortgage brokers John Charcol, predicted that the mortgage book would be cut by 50% in the next two years.

Mr Boulger said that the management had already increased mortgage rates so that they were 1-1.5 percentage points higher than other lenders, effectively dissuading new customers.

"The key point is the action the management have taken over the past few months. It was a lot of what was necessary to downsize the business," he said.

He estimated that 60% of customers were on two-year fixed deals and had started to walk away already.

A spokeswoman for price comparison website Moneyfacts.co.uk also said that much of Northern Rock's business came from mortgage brokers, who would have been finding recently that the Rock's rates were higher than other lenders.