18th May 2017
Louise Power summarises the key aspects of the FCA’s finalised guidance on the fair treatment of mortgage customers in arrears and the impact of automatic capitalisation, and offer their practical advice.
Since 2010 it has been contrary to the Mortgages and Home Finance: Conduct of Business Sourcebook (MCOB) rules for firms to automatically capitalise mortgage arrears where the impact on the customer would be material. Following an investigation into the fair treatment of mortgage customers in arrears and the impact of automatic capitalisation, which included a public consultation and input from an industry working group comprised of two trade associations and ten firms from across the retail lending section, the FCA concluded that some firms automatically include customers’ arrears balances within contractual monthly instalments (CMI) calculations, following a calculation trigger (such as an interest rate change); and that that amounts to automatic capitalisation in contravention of the MCOB rules. Although acknowledging that the automatic capitalisation may be inadvertent on the part of some lenders, the FCA has noted that it results in firms automatically collecting the arrears over the remaining term of the mortgage, while also treating them as immediately payable. That can lead to higher CMIs and a number of possible unfair outcomes for customers, including (non-exhaustively): less disposable income and therefore arrears taking longer to repay and/or missing payments on other financial commitments; an adverse effect on credit records; arrears management fees being charged incorrectly or inappropriately; and arrears balances being presented inaccurately on court applications.
The FCA has therefore now published its finalised guidance for residential mortgage lenders and administrators of regulated mortgage contracts on the fair treatment of mortgage customers in arrears and the impact of automatic capitalisation. The guidance confirms that the FCA expects firms to:
The guidance also:
As of August 2016 the FCA estimated that around 75,000 customers will have been affected by automatic capitalisation. That figure is likely to have increased, however, following the base rate change later in that month. While many thousands of customers will be entitled to remediation, the FCA’s analysis has indicated that the likely level of repayment due to each customer will be relatively low, possibly in the low hundreds of pounds.
If firms can be proactive and efficient in implementing their review and remediation process, the costs associated with compensating customers can be kept to a minimum. Walker Morris will be happy to help firms to achieve that aim, by providing a ‘one stop shop’ service, whereby we can help you: to review your recoveries systems and all relevant legal documents; to consider and respond to customer claims (where appropriate); to draft or review your customer communications; and to implement an effective remediation process as quickly and efficiently as possible. If you would like any further advice or assistance in connection with the FCA’s findings and finalised guidance, please do not hesitate to contact Louise Power.