Posted: 3rd November 2016


On the 19th of October, the FCA announced that it will consult on new guidance on the treatment of customers with mortgage payment shortfalls (arrears).

The regulator has identified that some lenders and administrators have automatically included customers’ arrears balances within their monthly mortgage payments which are recalculated from time to time, for example when an interest rate changes.

 “Effectively, because firms have not extinguished (reduced to zero) the arrears, they are collecting the arrears over the remaining mortgage term through a higher monthly payment and continuing to pursue the arrears through their collections processes treating them as immediately payable.” (GC16 / 6)

In June 2010, the then-FSA introduced a rule stipulating that firms must not automatically capitalise a payment shortfall where the customer impact would be material.

The FCA considers this practice to be ‘automatic capitalisation’ and a likely breach of their rules. The regulator believes that the automatic inclusion of arrears balances in customers’ mortgage payments lacks transparency and could lead to harm. For example, it can take a customer longer to repay their arrears and may lead to inappropriate fees being charged in relation to the arrears.

Key points from GC16 / 6

The FCA has been unable to determine the overall number of customers affected by this issue. However, through engagement with the industry it has identified a population of approximately 750,000 customers who have been impacted. Due to the Bank of England base rate change in August this number may now be greater as the rate change may have led to further recalculation of some customers’ mortgage payments.

The FCA has produced a guidance framework to help firms identify affected customers. The framework also indicates potential resolutions for customers in different circumstances and suggests how to calculate appropriate compensation:

  • For closed mortgage accounts where the inclusion of a payment shortfall in a single calculation of CMI (contractual monthly instalment) resulted in an additional payment of equal to or less than £10, no action needs be taken
  • For open mortgage accounts where the inclusion of payment shortfalls led to an additional payment of equal to or less than £10, a CMI recalculation, excluding any outstanding payment shortfall balances, must be undertaken
  • For both open and closed mortgage accounts with an additional payment greater than £10, a firm must put the account back in the position it would have been in if payment shortfall balances had not been automatically capitalised

The FCA has also suggested that firms’ remediation communications should clearly describe the impact of automatically capitalising payment shortfall balances, what has happened and the steps taken to put it right including:

  • Noting that the firm has determined that it treated payment shortfalls (for some customers) in a way that the FCA considers to be a breach of its rules
  • Setting out how this may have adversely affected the customer
  • Advising the amount of compensation (and any other remedial action) and how this has been decided
  • Informing the customer that they are entitled to reject the firm’s offer of remediation and instead make an individual complaint to the firm and, if not satisfied with the outcome, to the Financial Ombudsman Service

To prevent similar issues to this one occurring in the future “firms must ensure that all systems are reviewed considering the implications of a rule change.” (Jonathan Davidson, FCA Director of Supervision).

Regulatory next steps

The FCA proposes that firms should notify all customers who are in scope for remediation before the 30th June 2017 and remediation programmes concluded within the following 12 months.

They have asked for all consultation responses to be submitted by close of business on the 18th January 2017.

Considerations for firms

Jonathan Davidson said:

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

It is clear that it will be incumbent on firms to drive the remediation of customers. Firms should therefore consider:

  • The number of customers who may have been affected, and their methods for identifying those customers for whom automatic capitalisation was applied
  • The capacity required to identify affected customers, calculate redress, communicate with those customers and make redress payments
  • The likely timescales for this activity based on the extent of the issue within the firm

Additionally, the FCA has issued a step-by-step guide on calculating redress, which can be found on page 19 of GC16 / 6 (written guidance follows after) – this should be seen as guidance only, the FCA is keen to note. Firms must consider any internal or external factors that might cause their actual remediation methodology to differ.

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