FCA launches mortgage arrears consultation

John Hewitt Jones

October 19, 2016

FCA financial conduct authority

The Financial Conduct Authority has announced it will consult on new guidance for the treatment of customers with mortgage arrears.

The new rules will refer to mortgage customers whose arrears balances have been automatically included within the amount of monthly mortgage payments when interest rates are recalculated.

Including customers’ arrears balances in changes to the amount of interest charged following interest rate changes is considered “automatic capitalisation” by the FCA, and is likely to breach the regulator’s rules.

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Some firms are collecting arrears over the remaining mortgage term through a higher monthly payment and continuing to pursue arrears through their collections processes treating them as immediately payable.

The automatic inclusion of arrears balances in customers’ mortgage payments lacks transparency and can lead to harm, the regulator said.

Jonathan Davidson, 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.

“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.”

Historically the practice has included adding the arrears to the mortgage balance owed; extinguishing the arrears and recovering the arrears through an increase in monthly payments.

Capitalisation is permitted, when the individual circumstances of the customer are considered and with the customer’s agreement.

Davidson added: “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 will monitor work carried out by firms to determine whether customers have suffered as a result of firms’ approach to remediation, and use formal interventions such as enforcement action to deal with unfair firm behaviour.

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