The Financial Conduct Authority (FCA) is consulting on introducing new guidance on how firms should deal with customers who are in arrears on their mortgage. The guidance specifically relates to how customers should receive compensation as a result of previous unfair treatment.
The regulator has acted after finding that a number of mortgage lenders and administrators have been automatically adding arrears amounts to the mortgage balance, a practice known as capitalisation. This has the effect of increasing a customer’s monthly payments, increasing the length of time it takes them to clear the arrears and possibly incurring extra fees as well.
The FCA says it believes that automatically capitalising the arrears is both a failure to treat customers fairly and a breach of its rules. MCOB 13.3.2AR (6)(1) says that:
“A firm must consider whether, given the individual circumstances of the customer, it is appropriate to treat the payment shortfall as if it was part of the original amount (but a firm must not automatically capitalise a payment shortfall where the impact would be material).”
Capitalisation should only take place where the firm has decided that it is the most appropriate option for a customer in arrears, and where the customer has given consent for this to occur. The FCA acknowledges that sometimes automatic capitalisation takes place due to the way a firm’s computer system works, but adds that this cannot be used as an excuse for carrying out the practice where it is inappropriate to do so.
The FCA estimates that at least 750,000 customers may have been disadvantaged by use of automatic capitalisation. It has worked with an industry working group to provide a new remediation framework that firms can use to pay redress to affected customers, and is now consulting on this proposed framework.
The regulator says it will continue to monitor the way firms treat customers in arrears, and that enforcement action could follow for those that fail to comply with its rules and to treat customers fairly.
The guidance consultation closes on January 18 2017.
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.
“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.”
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