The decision was made after the Financial Conduct Authority raised concerns that some YBS customers had been charged incorrectly as a consequence of its procedures not being robust enough - YBS is the first organisation to take this step on a voluntary basis.
The total bill is expected to reach £8.4m with approximately 33,900 current and former customers receiving an average of £247 back in refunded fees.
To ensure people do not face lengthy delays and uncertainty in getting redress, YBS has agreed to refund all arrears administration fees charged since January 2009, plus interest on those fees. This means that borrowers who were charged correctly will also receive a refund.
The refund process including letters to customers with details of the exercise will commence on 25 February 2014, and redress will start to be paid from this date.
Clive Adamson, director of supervision, said:
"The FCA has worked closely with Yorkshire Building Society to get to the heart of this issue and ensure that customers are refunded what they are owed. We have been encouraged that they are now putting customers first by paying redress to everybody in arrears, not just those who were overcharged.
"But this is nonetheless a very important reminder that firms must take responsibility for any wrongdoing and make sure their customers get a fair deal."