FCA introduces new mortgage arrears guidance for lenders

"When the higher CMI is paid this reduces a customer’s mortgage balance and the interest charged; effectively customers are making overpayments towards their mortgage balance."

The FCA admitted that this number may now be even higher due to the Bank of England base rate change in August 2016, and has now set up a new framework to assist firms in remediating affected customers.

The investigation found that some mortgage firms have automatically included customers’ arrears balances within their monthly mortgage payments which are recalculated from time to time, for example when an interest rate changes. The FCA considers this practice to be ‘automatic capitalisation’.

In its finalised guidance, the FCA stated: "Automatically including payment shortfall balances within a Contractual Monthly Instalment (CMI) calculation results in a higher CMI – compared to a CMI without the payment shortfall balance being included. When the higher CMI is paid this reduces a customer’s mortgage balance and the interest charged; effectively customers are making overpayments towards their mortgage balance. However, the higher payment does not reduce the payment shortfall balance as recorded by the firm."

In this case, lenders are not recognising the increased payment as including a partial payment towards the clearance of the payment shortfall balance. The FCA says this leads to payment shortfalls taking longer to repay, arrears management fees being charged inappropriately, and payment shortfall balances being presented unclearly or incorrectly.

The regulator says its new framework "is intended to set out a proportionate, practical and fair approach for remediation". Use of the framework is not mandatory, but the FCA says it expects firms to "determine a remediation approach to achieve fair outcomes for affected customers".

FCA analysis indicates that the financial impact for most customers has been relatively small with estimated remediation likely to be in the low hundreds of pounds.

The FCA said: "The framework provides firms with an option that they could use to start remediating customers, saving time and cost in coming up with their own approaches. If firms were to conduct individual case reviews we estimate the cost would be approximately £2,000 per customer. By making the compensation process as efficient as possible much of this cost should be avoidable."

The FCA expects all remediation programmes to be concluded by 30 June 2018.