FCA overhauls mortgage arrears after 750,000 ‘unfairly’ overcharged

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The Financial Conduct Authority called on lenders to overhaul their arrears processes after finding 750,000 borrowers have been overcharged.

The problem sees lenders including consumers’ arrears balance in their monthly mortgage repayments when these are occasionally recalculated.

If lenders do not take out the arrears figure when recalculating mortgage payments then consumers effectively pay twice, leading to “unfair customer outcomes”.

Last October the FCA consulted and published guidance for lenders on the issue.

An FCA final guidance notice published today says: “All of the firms we assessed have updated their collections processes in line with our rule requirements, so their arrears management systems include consideration of customers’ individual circumstances before they arrange a capitalisation of payment shortfall.

“However, some firms do not appear to have considered the implications for the systems they use to calculate customers’ CMIs.

“We expect firms to put this right, and stop the practice.”

The FCA says the practice is called ‘automatic capitalisation’.

The guidance says: “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.”

The regulator teamed up with an industry working group and found at least 750,000 customers could be affected, with each overcharged hundreds of pounds.

The FCA statement says: “This number may be greater now, due to the Bank of England base rate change in August 2016, leading to a new CMI [contractual monthly installments] calculation for some customers.”

The FCA says the cost to lenders of fixing the problem could be as high as £2,000 per customer, or around £1.5bn in total.

But the regulator has brought in a remediation framework to lower the cost and help consumers.

The FCA says: “The framework provides firms with an option that they could use to start remediating customers, saving time and cost in coming up with their own approaches.”

The regulator launched a consultation on the issue last September.

The consultation said: “The automatic inclusion of arrears balances in customers’ mortgage payments lacks transparency and can 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.”