FCA orders lenders to refund overcharged mortgage arrears customers

The FCA is to consult on new guidance on the treatment of customers who have been affected by the way some firms calculate monthly mortgage payments after it found as many as 750,000 may have been overcharged.

Regulators said they had found some lenders automatically included customers’ arrears balances within their monthly mortgage payments which are recalculated from time to time, such as when an interest rate changes.

The watchdog said it considers this practice to be ‘automatic capitalisation’, which was banned by the FCA’s predecessor in June 2010.

Effectively, because firms have not extinguished (reduced to zero) the arrears, they are collecting arrears over the remaining mortgage term through a higher monthly payment while continuing to pursue the arrears through their collections processes treating them as immediately payable.

The automatic inclusion of arrears balances in customers’ mortgage payments lacks transparency and can lead to harm.

When customers do meet the higher mortgage payments and also separately clear their arrears they are making overpayments to their mortgage account which can result in them repaying their mortgage account more quickly than would otherwise be the case.

Capitalisation is only permitted when the individual circumstances of the customer are considered and with the customer’s agreement.

The FCA’s work indicates that the financial impact on the majority of affected customers may have been relatively small with estimated remediation (where appropriate) likely to be in the low hundreds of pounds per individual.

The FCA said it had not been possible for it to determine the precise number of customers affected, but has collaborated with an industry working group to identify approximately 750,000 affected customers.

The FCA has developed a remediation framework in order to provide a proportionate, fair and timely remediation option that firms can use.

Use of the framework will not be mandatory; the FCA expects firms to determine a remediation approach to achieve fair outcomes for affected customers, the framework is one option.

Jonathan Davidson, director of supervision – retail and authorisations at the FCA, said: “Even if inadvertent, automatic capitalisation of arrears can lead to poor customer outcomes and firms need to put this right, and make sure the practice stops.

“Customers do not have to take any action at this stage, as firms will contact them directly. Firms should start identifying affected customers immediately and not wait until the finalised guidance is published.

“To prevent similar issues to this one occurring in the future firms need to ensure that all systems are reviewed when considering the implications of a rule change.”