FCA tell mortgage lenders to remediate customers impacted by automatic capitalisation

The FCA have published a guidance paper in October 2016, GC 16/6, setting out their concerns about the adverse impact of the practice followed by some mortgage lenders (especially when any rate changes are effected) resulting in automatic capitalisation of the customers’ payment shortfall. They have found that some mortgage firms (lenders and administrators) have automatically included customers’ payment shortfall balances within their contractual monthly instalments (CMI), which are recalculated from time to time, for example when an interest rate changes.

FCA consider this practice to be ‘automatic capitalisation’ of payment shortfalls and a likely breach of their rules in MCOB.

Accordingly to the FCA, because firms have not extinguished (reduced to zero) the payment shortfall, they are collecting the payment shortfall over the remaining term through a higher monthly payment and also continuing to pursue these balances through their collection processes, treating them as immediately payable.

The FCA believe it might be driven by firms’ historical systems programmed to ensure the CMI is sufficient to repay the mortgage by the end of term.

FCA have said that even if inadvertent, the practice lacks transparency for customers and can lead to harm. Therefore they expect firms to take appropriate action to put this right, and make sure the practice stops. The proposed remediation framework set out by the FCA in the GC is one option firms could use to do this.

FCA have developed the remediation framework with input from an industry working group. Use of the framework is not mandatory, but they expect firms to determine a remediation approach to achieve fair outcomes for affected customers. The FCA’s priority is to ensure a proportionate, practical and fair remediation approach, delivered in a timely manner.

The FCA have said that they will monitor the work firms carry out to determine whether customers have suffered as a result of firms’ approach to remediation, reserving the use of formal interventions, such as enforcement action to deal with any unfair firm behaviour.