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Automatic capitalisation: Finalised FCA guidance and remediation framework

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.

The issue

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 solution

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:

  • review whether, in respect of regulated mortgages and home purchase plans subject to the relevant FCA rules during the period since 25 June 2010, they have automatically capitalised arrears, and if so to review whether this has caused harm to customers;
  • provide appropriate remediation;
  • explain the impact of automatic capitalisation clearly and fairly to affected customers, as well as what steps they have taken to remediate;
  • make whatever changes are needed to policies, procedures, systems and to terms and conditions to ensure compliance with the FCA’s requirements and the MCOB rules; and
  • review their provisioning and capital to take account of the impact and consequences of remediation.

The guidance also:

  • contains a suggested framework and a ‘how to’ guide that firms can use to correct the effects of automatic capitalisation and to pay compensation to customers; and
  • sets a deadline for completion of remediation of 30 June 2018.

WM Comment

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.