Are You Correctly Allocating the Payments Received from Customers with a ‘Payment Shortfall’?

The Financial Conduct Authority (FCA) published in June 2016 a consultation paper, CP16/16, on proposed changes to its requirements for firms when dealing with customers experiencing a payment shortfall.

The rules set out in the Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) chapter 12 are designed to ensure that firms do not impose unfair or excessive charges. In particular, MCOB 12.4.1BR sets out how the FCA expect firms to allocate payments received from customers who are suffering a
payment shortfall. The rule aims to ensure that payments are allocated in a way that minimises the time taken to pay off the arrears and thus reduces the amount paid in related fees and charges.

The FCA has recently reviewed a number of firms’ allocation of payments processes. As a result, they believe it would be helpful to amend the wording of MCOB 12.4.1BR, as below to remove any ambiguity in allocating such payments.

“When a customer has a payment shortfall in respect of a regulated mortgage contract, a firm must ensure that no part of any payment received in respect of that contract is allocated towards paying interest or charges incurred because of a payment shortfall before the balance of the payment shortfall has been cleared”

FCA have also clarified that the definition of payment shortfall was not intended to include outstanding amounts other than missed CMI of capital or interest (or both). They have decided to amend the definition of a payment shortfall as below to ensure that fees, charges, interest (on missed payments) and ancillary items (such as unpaid service charges settled by the lender) are not included within payment shortfall.

“The total sum of periodic instalments of capital or interest (or both) that has become due under the terms of a regulated mortgage contract but which, in breach of those terms, remains unpaid”

The above rule changes clarify the regulatory expectations to help ensure an appropriate level of consumer protection.