Thousands of mortgage arrears customers to get redress

Bank of Scotland branch Image copyright Getty Images
Image caption Bank of Scotland is among the lenders who have been accused of double charging customers

Hundreds of thousands of consumers in arrears on mortgage payments may be eligible for compensation, after a ruling by the regulator.

The Financial Conduct Authority (FCA) has ordered lenders to work out who is affected, and how much they are owed.

The problem has arisen where mortgage arrears have been automatically included in regular monthly payments.

That has left some customers paying higher mortgage payments than they should have been.

As many as 750,000 consumers may have been affected overall, but not everyone will be entitled to compensation.

On average, those who are eligible for payments will receive redress "in the low hundreds" of pounds, the FCA said.

In 2014, a High Court judge in Northern Ireland criticised the Bank of Scotland for double-charging mortgage customers who were in arrears.

Master Ellison said the bank's behaviour had been "unconscionable".

Image copyright Getty Images

'Poor outcomes'

The practice of recalculating mortgage payments to include any outstanding arrears is known as "automatic capitalisation".

In effect it means that some customers may have been paying twice for going into arrears: Once through higher monthly mortgage payments, and once through separate payments to clear the outstanding debt.

In the long run such customers would not necessarily have lost out, as they would have paid off their mortgages faster.

Six years ago the then Financial Services Authority (FSA) said automatic capitalisation should not be allowed when there was a negative impact on customers.

"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, the FCA's director of supervision for retail and authorisations.

"Customers do not have to take any action at this stage, as firms will contact them directly. Firms should start identifying affected customers immediately and not wait until the finalised guidance is published."

The Council of Mortgage Lenders (CML) said banks and building societies had always been transparent in their charging methods.

"Those lenders who used the arrears calculation methodology now identified as problematic did so in good faith, believing that they complied with the rules and were acting in customer interests," said Paul Smee, the CML's director general.

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