Hundreds of thousands of borrowers in arrears on their mortgage could be in line for compensation from their lender, according to the UK financial regulator.
The Financial Conduct Authority said that some mortgage lenders have automatically included customers’ arrears balances within their monthly mortgage payments, leaving them paying more than they should have been.
An industry group set up by the financial watchdog estimated that 750,000 customers had been affected, with compensation likely to be in the low hundreds of pounds per individual.
Arrears balances are recalculated from time-to-time, for example, when an interest rate changes. The regulator considers this practice to be automatic capitalisation and a likely breach of its rules.
In June 2010, the FCA’s predecessor, the Financial Services Authority, introduced a rule saying that firms must not automatically capitalise a payment shortfall where the impact on the customer would be material.
The purpose of the rule is to stop automatic capitalisations without consideration of customers’ individual circumstances.
The Bank of England base rate change in August means the number affected could be greater than 750,000 due to lenders changing their variable rates.
The FCA said that lenders will have until the end of June to identify borrowers that have been affected.
Jonathan Davidson, director of supervision for 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.”
The Council of Mortgage Lenders said that lenders now being identified as problematic had always been fully transparent with the regulator.
Paul Smee, CML director general, said: “Those lenders who used the arrears calculation methodology now identified as problematic did so in good faith, believing that they complied with the rules and were acting in customer interests. They are fully committed to delivering fair outcomes for all customers, past and present.”
