The City regulator has called time on automatic capitalisation of arrears and told lenders to put right the mortgage repayments of those hit by the practice.
In a paper published today (19 October), the Financial Conduct Authority announced it will produce new guidance on how lenders should treat customers with mortgage payment shortfalls.
The FCA has identified that some lenders have been automatically adding customers’ arrears balances within their monthly mortgage payments which are recalculated from time to time, for example when an interest rate changes.
The FCA considers this practice to be ‘automatic capitalisation’ and a likely breach of the regulator’s rules.
According to the regulator it has not been possible to determine the number of customers affected by this issue across the industry.
However, through its work with an industry working group (which represents around 66 per cent of the market share based on outstanding mortgage balances) the FCA has identified about 750,000 affected customers.
Due to the Bank of England base rate change in August however the FCA stated this number may now be far greater as the rate change may have led to further recalculation of some customers’ mortgage payments.
With automatic capitalisation because lenders have not reduced to zero the arrears, they are collecting the arrears over the remaining mortgage term through a higher monthly payment.
Lenders are also continuing to pursue the arrears through their collections processes by treating them as immediately payable.
This latest action over arrears handling comes despite the fact that back in 2010 the Financial Services Authority introduced a rule stating firms must not automatically capitalise a payment shortfall where the impact on the customer would be material.
The purpose of the rule was to stop automatic capitalisations without consideration of customers’ individual circumstances.
Jonathan Davidson, director of supervision for retail and authorisations at the FCA, said: “Even 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.”
Sue Anderson, head of member and external relations at the Council of Mortgage Lenders, said lenders that used the methodology now being identified as problematic acted in good faith, believing it to be in line with the rules, and good customer outcomes and the regulator’s expectations.
She said: “They will now of course work to ensure that customer remediation is put in place where appropriate. Customers won’t need to do anything – lenders will identify and get in touch with those affected.”
Robert Sinclair, chief executive of the Association of Mortgage Intermediaries, said once again, as a sector, the mortgage industry has not done the best by those who are financially vulnerable.
He said: “The FCA is trusting firms to put this right and we must ensure we are worthy of that trust. The intermediary community will support their lender partners in putting this right.”
emma.hughes@ft.com
