Clydesdale Bank has been fined for failing to inform customers clearly of their rights after it miscalculated repayments on more than 42,500 mortgages.
Between 2008 and 2009, when interest rates began to fall steeply, an error in the way Clydesdale (and sister group Yorkshire Bank) calculated repayments meant that around 22,000 variable-rate customers underpaid on their mortgages and were left with shortfalls.
The shortfalls ranged from less than £20 to more than £18,000, with an average of £970 - but in some cases, customers were unable to repay their mortgages by the end of the agreed term.
From 2010 the bank sent letters to the 22,000 affected customers, who were given no alternative but to bring their repayments up to date. They were effectively made to pay higher than expected monthly repayments to correct the error.
However, the Financial Conduct Authority (FCA) has ruled that affected customers should not have to repay the shortfall and those that lost out as a result of having to make higher repayments should be compensated.
In a statement, the regulator said Clydesdale failed to inform customers they were entitled to reject demands to repay the shortfalls caused by the bank's error.
It added: "This lack of clarity was compounded by poor instructions to Clydesdale's call handlers for dealing with customers who called to complain.
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"In seeking repayment from customers as a priority, it wrongly sought to balance its own commercial interests against the requirement to treat customers fairly."
The FCA has fined the bank £8.9 million and Clydesdale will now compensate affected customers, who will be contacted directly.
Tracey McDermott, the FCA's director of enforcement and financial crime, said: "For most people mortgage payments are their biggest monthly outgoing and we all budget on the assumption that the information our mortgage lender gives us about what we need to pay is correct.
"Here Clydesdale failed in that basic duty and, when it discovered the problem, sought to pass all of the consequences on to its customers - expecting them to find the money to remedy mistakes which were entirely of Clydesdale's making."
David Thorburn, chief executive of Clydesdale Bank and Yorkshire Bank, said: "I am very sorry that this wasn't handled as it should have been. We should have made it clear at the time that this was entirely our fault and that some customers may be entitled to compensation."
He added: "Where our error resulted in a capital shortfall on a customer mortgage, the Bank will write off the entire shortfall, make a payment representing interest costs and recalculate the reduced payment amount where appropriate."