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FCA: Mortgage shortfall practices may breach rules

The Financial Conduct Authority (FCA) will consult on new guidance for treating customers with mortgage payment shortfalls, after warning current practices may breach rules.

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The guidance covers remediation for customers with payment shortfalls (commonly described as arrears), who may have been affected by the way firms calculate these customers’ monthly payments.


About 750,000 customers may have been affected, the FCA said.


Some lenders and administrators, the regulator said, have automatically included customers’ arrears balances within their monthly mortgage payments.


These payments are recalculated from time to time, for example when an interest rate changes.


The FCA said this practice is ‘automatic capitalisation’ and a likely breach of its rules.


An announcement from the regulator explained that, effectively, because firms have not reduced the arrears to zero, they are collecting the arrears over the remaining mortgage term through a higher monthly payment.


Lenders and administrators are also continuing to pursue these arrears through their collections processes – treating them as immediately payable, the FCA added.


The regulator said the automatic inclusion of arrears balances in customers’ payments “lacks transparency and can lead to harm”.


It gave the example that it can take a customer longer to repay their arrears and may lead to “inappropriate fees being charged in relation to the arrears.”


The FCA added: “When customers do meet the higher mortgage payments and separately clear their arrears, they are making overpayments to their mortgage account.


“This can result in them repaying their mortgage account more quickly than would otherwise be the case.”

John’s story

The FCA has written an example – ‘John’s Story’ – a case study showing how the practice it has concerns about may affect customers.


In June 2010 its predecessor, the Financial Services Authority, introduced a rule that firms must not automatically capitalise a payment shortfall where the impact on the customer would be material.


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


The FCA acknowledged that a number of firms in the mortgage industry have identified this issue within some of their books.

Firms will be impacted to different extents; for some it may affect most of their arrears book and for others a small subset.


The FCA has developed a remediation framework with input from an industry working group, to provide a remediation option that firms can use.


Use of the framework will not be mandatory, but the FCA said it expects firms to determine a remediation approach to achieve fair outcomes for affected customers.


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.”

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