Abbey National could be paying compensation to thousands of customers after a watchdog found the bank's mortgage pricing policy was unfair.

The bank said it was disappointed with the decision by the Financial Ombudsman Service, the statutory body which deals with consumer complaints.

The ombudsman found against Abbey on a complaint that its cashback mortgage deal was linked to Abbey's standard variable rate and not one of its lower tracker rates.

Abbey argued it had never operated a dual pricing strategy and there was no ambiguity for borrowers as the terms and conditions of the products clearly distinguished between the different rates.

It said to bring the issue to a close, it had decided not to take the matter further and to accept the decision.

It said the ombudsman's decision related only to one particular case, although it revealed a number of customers had written to express concern about their rate.

A spokeswoman said the figure was less than one per cent of its mortgage book, which works out at about 20,000 customers.

But it means the bank could be paying compen-sation to thousands of customers. It will now start re-contacting the customers in the light of the decision.

Abbey said in eligible cases it would refund interest from the date the customer first made contact with the bank, in recognition of the delay in responding to their complaint.

The bank said the financial consequences of the decision were not material. It is, however, thought the decision will cost it millions.

Earlier this year, the Nationwide building society announced it was giving 400,000 borrowers refunds totalling £90 million after charging them a higher mortgage rate than other customers.

Halifax has so far paid out £12 million in compensation to around 30,000 borrowers.