The FCA has published Finalised Guidance 17/4: The fair treatment of mortgage customers in payment shortfall: impact of automatic capitalisations (FG17/4). The guidance in FG17/4 is primarily aimed at residential mortgage lenders and administrators of regulated mortgage contracts. It follows an earlier FCA guidance consultation which was published in October 2016 which is blogged here.
The FCA considers that including payment shortfall balances within contractual monthly instalment (CMI) calculations can lead to unfair customer outcomes. In FG17/4 the FCA sets out a remediation framework for customers who have suffered harm because of automatic capitalisation of payment shortfalls. The framework is intended to set out a proportionate, practical and fair approach for remediation. Use of the framework is not mandatory, but the FCA expects firms to determine a remediation approach to achieve fair outcomes for affected customers.
The framework, including the £10 threshold, is not a precedent for other customer remediation programmes. It was developed by the FCA with specific consideration to the automatic capitalisation of payment shortfall issue set out in the guidance.
In line with 1.3.6G of the Dispute Resolution: Complaints sourcebook and Principle 6 of the Principles for Businesses, the FCA expects relevant firms to read FG17/4 and:
- review whether, in respect of regulated mortgages and home purchase plans subject to the relevant FCA rules and Principles during the period since 25 June 2010, they have automatically included payment shortfalls balances in their CMI calculations;
- if they have, review whether this practice has caused harm to customers who were protected by the relevant rules; and
- if so, assess and provide appropriate remediation.
In addition, the FCA expects firms to:
- explain the impact of automatic capitalisation to affected customers clearly and fairly and what steps they have taken to put it right;
- make whatever changes to policies, procedures and systems are needed to ensure they comply with the regulator’s requirements, and consider whether terms and conditions are consistent with those requirements; and
- consider the associated prudential risks. As such, firms should review their provisioning and capital to take account of the impact and consequences of remediation.
The FCA expects all remediation programmes to be concluded by 30 June 2018. Firms must treat any affected customers fairly if they are currently in payment shortfall or enter payment shortfall before remediation activity and related systems changes have been completed. Firms should also consider how they prioritise the delivery of remediation to customers.