The FCA has published a finalised guidance paper FG17/4 relating to the fair treatment of mortgage customers in payment shortfall.
The guidance relates to firms automatically including customers’ mortgage payment shortfalls (arrears) within their contractual monthly instalments (CMI). This process is known as “automatic capitalisation” and by doing so, results in the customer being subject to payment of the shortfall balance over the term of the mortgage, whilst also treating it as being immediately payable.
The guidance comes on the back of the MCOB rule (introduced by the FSA in 2010) which states that “firms must not automatically capitalise a payment shortfall where the impact on the customer would be material”.
The latest FCA paper states “Automatically including payment shortfall balances within a CMI calculation results in a higher CMI – compared to a CMI without the payment shortfall balance being included. When the higher CMI is paid this reduces a customer’s mortgage balance and the interest charged; effectively customers are making overpayments towards their mortgage balance. However, the higher payment does not reduce the payment shortfall balance as recorded by the firm”.
As a result of automatically including payment shortfalls within CMIs, it can lead to a number of unfair customer outcomes including payment of shortfalls taking longer to repay and arrears management fees being charged inappropriately.
It is noted that automatic capitalisation may have occurred as a result of historical systems, but this may still have adversely impacted the customer and remediation may be appropriate. The FCA outline that remediation programmes relating to automatic capitalisation should be concluded by 30 June 2018.