The FCA has published its finalised guidance “the fair treatment of mortgage customers in payment shortfalls: impact of automatic capitalisations” (FG17/4).

The finalised guidance follows a consultation launched ion October 2016 (GC16/6).

The FCA has found that a number of firms are automatically capitalising payment shortfalls despite the requirement in MCOB not to do so if the impact on the customer would be material. In the FCA’s view, this practice can lead to unfair customer outcomes including:

  1. Payment shortfall balances may be overstated if customers meet the new higher contractual monthly instalments – where lenders do not recognise the increased payment as including a partial payment towards the clearance of the payment shortfall balance – this may lead to:
    • payment shortfalls taking longer to repay, due to the higher contractual monthly instalments reducing customers disposable income;
    • arrears management fees being charged inappropriately when the customer effectively no longer has a payment shortfall;
    • customers’ payment shortfall balances being presented unclearly or incorrectly on court applications for possession or suspended possession orders;
    • customers’ payment shortfall balances and payment profiles being presented unfairly on credit reference agencies records.
  2. Customers might miss payments on other financial commitments – such as more expensive debt.

The FCA conducted a cross firm analysis and found that all firms assessed had updated their collections process in line with the MCOB rule but some firms had not considered the impact on the system they use to calculate contractual monthly instalments. The FCA acknowledges that this continued practice of automatic capitalisation may be inadvertent and driven by historical calculation systems and mortgage terms and conditions. Nevertheless, the FCA expects firms to put this right and stop the practice; the guidance also includes a non-mandatory remediation framework which the FCA considers to be a proportionate, practical and fair approach for compensating customers who have suffered harm.

The full guidance can be read here: FG17/04