More than 750,000 mortgage borrowers in the UK could be in line for compensation as a result of their bank overcharging them when they fell behind on repayments.
Financial watchdog, the Financial Conduct Authority, has revealed that technical glitches in many lenders’ systems had resulted in hundreds of thousands of customers being hit with excessive charges when they failed to pay their mortgage on time.
It means borrowers who fell into arrears after June 2010 could receive several hundred pounds in redress and lenders have until the end of June next year to investigate their systems and identify borrowers who have been affected. All customers who have been affected will be notified by this date, and lenders will then have a further 12 months to pay up.
The FCA has identified that some mortgage firms, lenders and administrators, 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’ and a likely breach of the FCA’s rules. Effectively, because firms have not reduced the arrears to zero they are collecting the arrears over the remaining mortgage term through a higher monthly payment and, also continuing to pursue the arrears through their collections processes treating them as immediately payable.
The FCA explained that the automatic inclusion of arrears balances in customers’ mortgage payments lacks transparency and can lead to harm. For example, it can take a customer longer to repay their arrears and may lead to inappropriate fees being charged in relation to the arrears.
When customers do meet the higher mortgage payments and also separately clear their arrears they are making overpayments to their mortgage account which can result in them repaying their mortgage account more quickly than would otherwise be the case.
A number of firms in the mortgage industry have identified this issue within some of their mortgage books. Firms are impacted by this issue to different extents, for some it may affect most of their arrears book and for others a small subset.
‘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,’ said Jonathan Davidson, the FCA’s director of supervision for retail and authorisations.
‘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,’ he explained.
‘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,’ he pointed out, adding that the FCA will monitor the work carried out by firms to determine whether customers have suffered as a result of firms’ approach to remediation, and reserve the use of formal interventions such as enforcement action to deal with any unfair firm behaviour.
According to Ishaan Malhi, chief executive officer of online mortgage adviser Trussle, it is a concern that more than 750,000 mortgage borrowers could be out of pocket because of a widespread technical glitch among UK lenders.
‘Mortgages are already a major source of stress for people, whether it’s getting the loan in the first place or keeping on top of the payments and the revelation from the FCA will only heighten this sense of confusion,’ he said.
‘The technology used in the mortgage sector falls some way short of other comparable industries, and while the calamity in question may only be down to one common system fault, the problem highlights the need for the mortgage sector to modernise in the way that it uses technology,’ he added.
