Lenders have been told to compensate a total of around 750,000 customers who may have been unfairly charged on their mortgage repayments.
The Financial Conduct Authority (FCA) has revealed some companies have been automatically including arrears balances when recalculating monthly repayment instalments.
Customers affected by the practice have effectively been paying twice, as firms have also been pursuing the shortfall balance separately through their collections processes.
The FCA has dubbed the practice ‘automatic capitalisation’.
Its finalised guidance paper states: “Even if inadvertent, it results in firms automatically collecting the payment shortfall balance over the remaining term of the mortgage, while also treating them as immediately payable.”
As the FCA paper stated, the higher payment does not reduce the payment shortfall balance as recorded by the lender.
Affected customers may have taken longer to repay payment shortfalls, faced inappropriate arrears management fees and suffered poor credit files as a result of automatic capitalisation.
For the majority of customers, compensation is expected to be in the form of a rebalancing of payments, but where a customer no longer has dealings with a firm it will be in the form of cash repayments.
The cost to lenders would be approximately £2,000 per customer if they were to conduct individual case reviews, but the FCA said much of the cost should be avoidable by making the compensation process as efficient as possible.
The regulator has provided a remediation framework in the paper to provide guidance on the matter and expects firms to have made appropriate redress by 30 June 2018.
Ray Boulger, senior technical manager at John Charcol, said he was surprised the number of people affected was so high, as the number of those in arrears has now fallen significantly.
He added: “There is a need to make sure lenders are dealing sympathetically and appropriately with customers in arrears. Some are sympathetic and others are significantly less so.
“Lenders should be required to monitor the best way of dealing with people in arrears, because there is likely to be a big variation. If someone has agreed terms and conditions and is keeping to those terms and conditions, the cost to the lender of monitoring it is quite small because it is all done by computer.”
Mr Boulger said the FCA has “a bee in its bonnet” about capitalising arrears, but it can be the right approach for some people, adding there is “no simple answer” to the issue.
simon.allin@ft.com
