FG17/4 – The fair treatment of mortgage customers in payment shortfall: impact of automatic capitalisations

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.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

Firms should ensure that any mortgage shortfalls are not automatically capitalised within CMIs and that this process has not occurred since 2010, in line with previous guidance.

Action Required By You

  • Review whether shortfall payments have been automatically capitalised within CMI payments since 25 June 2010;
  • If this has happened, assess whether this has caused harm to customers who were protected by the rule. If harm has been caused, provide appropriate remediation.

ATEB clients should speak with their account manager as necessary; otherwise contact ATEB here to find out how we can help.

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Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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