The FCA has published Policy Statement 16/25: Home finance customers with a payment shortfall: minor Handbook changes and feedback to CP16/16 (PS16/25).

PS16/25 will be of interest to firms administering mortgages or home purchase plans (HPPs) and trade bodies for these firms. Those who support the provision of these services may also be interested.

In June 2016 the FCA consulted on proposed changes to Mortgage and Home Finance: Conduct of Business sourcebook (MCOB) 12.4.1BR. The proposed changes were intended to clarify that, when a customer is suffering a payment shortfall, the firm must ensure that no part of any payment received from the customer is allocated towards paying un-capitalised interest or charges incurred because of a payment shortfall before the balance of the payment shortfall has been cleared. The FCA also consulted on changes to the definition of payment shortfall in order to make it clear that interest (on missed payments), outstanding fees and charges, and ancillary items (such as unpaid service charges settled by the lender on behalf of one of its borrowers) do not form part of a payment shortfall.

In PS16/25 the FCA sets out its final rules and guidance following the consultation. Having considered feedback the FCA has amended the provisions on which it consulted. A discussion of the changes can be found in chapter 2 of PS16/25. In particular, in relation to MCOB 12.4.1BR the FCA states:

“We welcome respondents’ support for our policy and we still believe that MCOB 12.4.1BR should be clarified. However, having considered responses to the consultation, we have amended our proposed rules and guidance to emphasise that. When considering the allocation of payments among: (1) periodic instalment; (2) payment shortfall; and (3) interest or charges resulting from that payment shortfall, a firm must ensure they allocate any payments they receive from a customer in a way that will minimise the amount of the payment shortfall once the payment has been allocated. We believe that this amendment will deliver the consumer benefits envisaged in CP16/16 and policy work that preceded it, while not unnecessarily limiting how firms meet our policy objective.

On balance, we believe there is still merit in introducing guidance to support this rule. The guidance makes clear that where sums (including potentially a payment shortfall) have been capitalised in accordance with our rules, those sums would form part of the CMI [contractual monthly instalment] and do not need to be treated as separate from it. Our rules would therefore not prevent a firm allocating a customer’s payments to the CMI, where this includes previously capitalised sums. However, as a consequence of our revision to MCOB 12.4.1BR and in light of feedback, we have made some minor adjustments to the supporting guidance.

This consultation did not contemplate changes to our policy, but rather clarification of the existing requirements. We currently do not prevent firms from charging interest on payment shortfalls related fees and charges and this consultation was not intended to alter this approach.

Where a customer has several sub-accounts, and there is a payment shortfall on at least one of those sub-accounts, our new rule drafting makes clear that a firm should allocate payments in an order of priority that will minimise the amount of the payment shortfall after allocation.”

The final rules and guidance come into effect on 15 December 2016.

View Home finance customers with a payment shortfall: PS16/25, 14 December 2016