Lenders to review systems to comply with FCA arrears guidance

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Mortgage firms are expected to review their policies and systems to ensure that they comply with the findings of the FCA’s guidance on mortgage arrears remediation announced earlier today.

FCA director of supervision, retail and authorisation Jonathan Davidson said that in the future the authority would look to “ensure all systems are reviewed when considering the implications of a rule change.”

The guidance covers remediation for mortgage customers who may have been affected by the way firms calculate payment shortfalls, or arrears.

We have looked at how firms calculate monthly mortgage payments and have identified that some have automatically included arrears balances in these calculations,” said Davidson. “This could be generated from an interest rate change.  

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

He said this can lead to customers taking longer to repay their arrears due to increased monthly payments and could also affect their disposable income, leading to a possible knock-on effect for payment of other debts.

The FCA has identified approximately 750,000 mortgage customers who have been affected by what it calls ‘automatic capitalisation’ and estimates remediation in the low hundreds of pounds per individual.

The ruling was preceded by a high court ruling in 2014 which found that the Bank of Scotland was double-billing mortgage customers in arrears.

The consultation will run for three months, until 18 January 2017.

Building Societies Association head of mortgage policy Paul Broadhead said the fact that this issue hasn’t been identified by the FCA during a number of recent reviews of lenders’ arrears handling processes “proves that this is not a simple matter.”

“Lenders have always believed that their collections processes are transparent and treat their customers fairly; ensuring that the customer is in a position to repay their mortgage by the end of their chosen term,” he said.

“As the FCA has now concluded that these existing processes don’t meet its expectations, lenders will need to digest the content of the consultation. Lenders will review their processes and identify any customer who may be impacted, they will then proactively contact affected borrowers to explain any impact it may have. There is no action for customers to take, they can be reassured that if they are affected they will be contacted by their lender.”

The Council of Mortgage Lenders says its members will take the initiative and contact any affected customers to pay compensation.