GC16/6: The fair treatment of mortgage customers in payment shortfall: impact of automatic capitalisations

Open consultation: GC16/6
19/10/2016
Consultation closes
18/01/2017
Finalised Guidance
Q1 2017
Q1 2017

We are consulting on new guidance on the treatment of customers with mortgage payment shortfalls. The guidance covers remediation for mortgage customers who may have been affected by the way firms calculate these customers’ monthly mortgage instalments.

Show GC16/6 (PDF)

Why are we publishing guidance on this?

We have found that some mortgage firms (lenders and administrators) have automatically included customers’ payment shortfall balances within their contractual monthly instalments (CMI) which are recalculated from time to time, for example when an interest rate changes.  

We consider this practice to be 'automatic capitalisation' of payment shortfalls and a likely breach of our rules.

Effectively, because firms have not extinguished (reduced to zero) the payment shortfall, they are collecting the payment shortfall over the remaining term through a higher monthly payment and also continuing to pursue these balances through their collection processes, treating them as immediately payable. We have written an example entitled 'John’s Story', this shows how the practice may affect customers.

We believe it might be driven by firms historical systems programmed to ensure the CMI is sufficient to repay the mortgage by the end of term.

Even if inadvertent, the practice lacks transparency for customers and can lead to harm. Therefore we expect firms to take appropriate action to put this right, and make sure the practice stops. The proposed remediation framework is one option firms could use to do this. 

We have developed the remediation framework with input from an industry working group. Use of the framework is not mandatory, but we expect firms to determine a remediation approach to achieve fair outcomes for affected customers. 

Our priority is to ensure a proportionate, practical and fair remediation approach, delivered in a timely manner.  

We will monitor the work firms carry out to determine whether customers have suffered as a result of firms’ approach to remediation, reserving the use of formal interventions, such as enforcement action to deal with any unfair firm behaviour.

Who is this guidance likely to be of most relevance to?

This guidance consultation is primarily aimed at residential mortgage lenders and administrators of regulated mortgage contracts. This will also be of interest to mortgage customers and consumer groups representing customers who have experienced, or are experiencing, payment difficulties with their mortgage.

This proposed guidance relates to the following rule(s) in the FCA Handbook:

We want to hear what you think 

Through this consultation, we are seeking feedback from industry (mortgage lenders and administrators) as well as consumer representatives, and any other interested parties.

We have provided a list of questions throughout Section 3 of the publication which we would welcome your views on; we have summarised these in Annex 1 of the guidance consultation.

Please feel free to provide comments on any or all of the questions, or anything else you feel may be relevant that has not been covered by the guidance consultation.

Please send your response by email to GC16/6@fca.org.uk. Alternatively, send them by post to:

Deborah Mullane
Supervision – Retail and Authorisation Division
The Financial Conduct Authority
25 The North Colonnade
London E14 5HS

Please send us your comments by 18 January 2017.