Redress may be due for 750,000 mortgage borrowers in arrears

Tom Wilson
19 October 2016

Some 750,000 people who have fallen behind on their mortgage repayments could be due redress, after the Financial Conduct Authority (FCA) found they may have had their outstanding debts unfairly processed by mortgage lenders.

The financial regulator has devised a plan for “proportionate, fair and timely remediation” that firms can use, although it isn’t mandatory – lenders can come up with their own plans, if they are reasonable.

The FCA says the cost to affected customers is “relatively small”, and should any redress be due it’s likely to be the tune of hundreds of pounds per person.


Jonathan Davidson, director of supervision at the FCA says: “Customers do not have to take any action at this stage, as firms will contact them directly.”

The FCA has also today launched a consultation on how to clarify the rules describing how lenders should treat mortgage payment shortfalls.

Why is redress due? 

The FCA found some companies have implemented a practice known as “automatic capitalisation”. This is where lenders have agreed a separate repayment plan for the arrears, but also included the outstanding debt in calculations for monthly repayments on the mortgage capital. This usually comes about when lenders recalculate monthly repayments after an interest rate change.

Lenders are allowed to do this, but they must seek customers’ agreement in advance under rules established by the financial regulator in 2010.

But the FCA believes some lenders’ have flouted this rule, and their practices “lack transparency and can lead to harm”.

Mr Davidson adds: “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.”

Why is auto-capitalisation a problem?

Where lenders have auto-capitalised debts, this is effectively agreeing a new repayment structure, and should mean the borrower is no longer in arrears.

However, in some cases, lenders haven’t done this, leading to people being reported as behind on payments for longer, damaging their credit rating and making it harder or more expensive to borrow in future. The regulator says this could lead to “inappropriate fees” being charged as a result. 

These errors wouldn’t normally lead to borrowers being double-charged for their debts, but it could lead to people being strong-armed into over-prioritising their mortgage payments, which could be damaging if they also have short-term debts, such as credit cards, which are incurring higher interest rates.


Which companies have been doing this?

The FCA hasn’t named names, though its preliminary investigation looked at 10 large and small banks and building societies, which account for around two-thirds of the UK’s total mortgage debt.

It found very different practices between lenders. For some companies just a handful of borrowers could be affected, though others may have mistreated the majority of customers who fell behind on their payments.

How damaging could auto-capitalisation be? 

The regulator believes around 750,000 people may have been affected. But as the miscalculations are usually triggered by a rate adjustment, the actual number could be higher following the recent Bank of England rate cut from 0.5% to 0.25%

What’s going to happen next?

Mr Davidson says: “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 FCA says it will continue to monitor firms and intervene if lenders don’t rectify cases where customers were unfairly treated.



In reply to by anonymous_stub (not verified)

Excellent clear article. Just wish there were downloadable spreadsheet(s) so as to calculate what should have been charged (and allowing for any ad-hoc extra payments) the mortgage holder has made and expects to pay. It appears, from some forum posts I read elsewhere - and from my own experience - that some of these dirty-dealing lenders have not owned up to their mistakes & have not provided any legitimate explanation & certainly no breakdown. In my case the lender made a small adjustment with an "oops we made a small miscalculation". No idea how to calculate the interest & payments in the first place, let alone if they were wrong or if they're still wrong! I believe FCA/FOS fraud looking at some of these dirty-dealers as they have not implemented the actions they agreed with FCA. I've only now - Aug 2018 - become aware of all this.

Mortgage miscalculation

I am being approached by various companies to make a claim. Is there any standard letters/documents to send to my lender to have my mortgage checked for possible miscalculation. Really need practical advice.

Thank you

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