Britain's banks back in the firing line for potential mortgage calculation failings

Oliver Gill
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The FCA said that some banks have been "automatically capitalising" customers' arrears balances (Source: Getty)

Mortgage lenders may have been over-charging hundreds of thousands of customers in arrears according to UK's banking watchdog.

The Financial Conduct Authority (FCA) today announced that it will consult for guidance on whether banks have broken FCA rules and miscalculated mortgage repayments.

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After working with 10 financial institutions as part of an industry working group, the FCA has identified that as many as 750,000 customers may have been affected by a practice called "automatic capitalisation". This impacts customers whose mortgage payments are in arrears and have arranged a catch-up schedule with their lender. It is specifically a problem when mortgage rates are reset.

Rates may change if customers have a non-fixed rate product or are coming to the end of a fixed rate and moving onto a variable rate.

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The FCA has found that upon such a rate change some banks were taking the balance in arrears and adding it to remaining balance on a mortgage and using this amount to calculate customers' new monthly mortgage cost.

While banks were not necessarily charging customers twice through such actions – i.e. for the balance in arrears and the rest of the balance outstanding – the FCA said that this practice may have had the affect of forcing customers to repay arrears at faster rate than previously agreed, potentially limiting their ability to repay other personal debts that may be more expensive.

“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," said Jonathan Davidson, a director of supervision at the FCA.

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