A consultation launched today by the regulator, proposes to put together a voluntary framework providing firms with guidance on how to remedy such processes which “can lead to harm” and are likely to breach FCA rules.
The FCA opened a wider investigation following a court case in 2014, where a judge ruled that Bank of Scotland had been double billing its customers by adding arrears to the mortgage balance while separately chasing for outstanding payments.
It found some lenders had inadvertently been mirroring Bank of Scotland’s behaviour because they were unaware of how their own IT systems operated.
Auto-capitalisation of arrears without customer consent was banned in June 2010 because the FCA said it lacked transparency. Firms removed the practice from their policies and it was thought the method had been brought to a halt. However, because of the way some systems are built, when an event triggers the need to recalculate a customer’s mortgage payment, such as an interest rate change, arrears are added to the overall balance automatically without the customer’s consent.
Unaware their systems were automatically continuing the practice, some firms pursued customers for arrears through their collections teams to organise separate payment plans.
Jonathan Davidson, the FCA’s director of supervision, retail and authorisations, said: “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.”
The exact number of customers affected by this treatment is not known, but the FCA has identified 750,000 potential cases from its work with a group of firms, which included lenders and third party administrators representing 66% of the market.
The financial impact on the majority of affected customers is likely to have been relatively small with compensation, if necessary, in the low hundreds of pounds per person.
Not all customers affected will be entitled to compensation, and firms choosing not to use the FCA’s framework must demonstrate they have a suitable remediation programme set up to treat customers fairly.
Customers do not have to take action at this stage and will be contacted if they have been affected. Davidson said firms should take action and begin identifying borrowers which may have been unfairly treated rather than waiting for the finalised guidance.
He added: “To prevent similar issues to this one occurring in the future firms need to ensure that all systems are reviewed when considering the applications of a rule change.”
The consultation closes on 18 January. Firms involved in the review will have until end of June 2017 to put in place remediation policies and rectify failings in their IT systems.