The City's financial watchdog, the Financial Conduct Authority, today revealed that technical glitches in many lenders' systems had resulted in hundreds of thousands of vulnerable customers being hit with excessive charges when they failed to pay their mortgage on time.
It means borrowers who fell into arrears after June 2010 could receive several hundred pounds in redress.
Jonathan Davidson, of the FCA, said: 'Customers do not have to take any action at this stage, as firms will contact them directly.'
Mortgage lenders have until the end of June next year to investigate their systems and identify borrowers who have been affected. All customers who have been affected will be notified by this date, and lenders will then have a further 12 months to pay up.
The FCA said the technical faults that caused the overcharging were so complicated that it is impossible at this stage to say how many mortgage lenders are at fault.
But it admitted that 'a number of firms in the mortgage industry have identified this issue within some of their mortgage books'.
Davidson said: 'Firms are impacted by this issue to different extents, for some it may affect most of their arrears book and for others a small subset.
'The FCA’s work indicates that the financial impact on the majority of affected customers may have been relatively small with estimated remediation, where appropriate, likely to be in the low hundreds of pounds per individual.'
The FCA says it has identified that multiple mortgage firms automatically included customers’ arrears balances within their monthly mortgage payments. This could mean that customers overpaid their mortgage without realising it.
It could also mean that their lender charged extra fees or interest, leaving borrowers out of pocket.
The reason for this is that the amount borrowers have to repay monthly is recalculated by lenders from time to time, for example when an interest rate changes or if borrowers come to the end of their deal and revert to their lender's standard variable rate.
The FCA refers to this recalculation as ‘automatic capitalisation’ and said today that where lenders have relied on this, it is likely to breach the FCA’s rules.
How does it work?
When a borrower falls behind with their mortgage payments, the late payments are added to their overall outstanding mortgage balance.
In June 2010, the FCA told lenders to contact every borrower who was late with their payments and to work with them to find a way to resolve the situation.
Generally lenders did this but they failed to check that their technology systems took accurate account of the agreement their collections department had made with affected borrowers.
As a result, the borrower and lender thought that the repayments were correct, but the technology was automatically carrying on as before, recalculating payments without reference to the agreement.
The FCA said: 'The automatic inclusion of arrears balances in customers’ mortgage payments lacks transparency and can lead to harm. For example, it can take a customer longer to repay their arrears and may lead to inappropriate fees being charged in relation to the arrears.'
How long have they known?
More than two years.
The problem was first raised with the FCA on 20 August 2014, when the Housing Rights Service brought a case against Bank of Scotland, part of Lloyds Banking Group, in Northern Ireland claiming the lender had 'capitalised' on borrowers’ arrears.
Essentially, the bank had been adding borrowers' arrears to the principal loan and overcharging interest on the total.
This resulted in the bank starting possession proceedings - seizing people's homes - against some borrowers who had been unfairly charged more than they owed.
During his judgement in August 2014 High Court Judge Master Ellison said Bank of Scotland’s 'reliance on extinguished arrears may fairly be described as double-billing' and was clear that bank had breached Financial Conduct Authority requirements, applicable across the UK.
He added: 'Unilateral consolidation with double billing creates very real problems for borrowers, their advisers and the court. To the extent at least of the double billing, it is unconscionable.'
Following the judgement the bank suspended all possession proceedings in Northern Ireland and in December 2014 it confirmed a temporary suspension of possession proceedings in the rest of the UK.
Why has the FCA waited until now to tell people?
Essentially the investigation has been complicated and the FCA isn't allowed to start dishing out orders until it has a clear understanding of what went wrong and how lenders should fix it.
The FCA has said it will keep a close eye on how lenders deal with customers who have suffered as a result of firms’ approach to remediation.
If they see poor treatment of borrowers, they have reserved their right to dole out fines or use other 'formal interventions such as enforcement action to deal with any unfair firm behaviour'.
Which lenders are affected?
The FCA's policy is never to comment on specific firms however it is possible that if you fell behind on your mortgage payments you after June 2010 are affected.
It doesn't matter whether you've now cleared your mortgage or are still paying it back - if you were overcharged, you'll be in line for redress.
The FCA has said there are a number of lenders, so don't assume it's just one or two. The full scale of this is likely to come out over the next nine months.
What did lenders have to say?
The lender trade body, the Council of Mortgage Lenders, said all lenders are 'fully committed to ensuring that they review past cases appropriately'.
A statement released today said: 'Lenders will pro-actively identify and contact affected customers to ensure that any compensation due to them as a result of this technical issue is paid.
'It is very unlikely that any customer in the past has experienced repossession who would not otherwise have done so if a different arrears calculation method had been used. Courts only ever grant repossession where there is a significant history of non-payment and little prospect that the customer will be able to recover, based on a holistic view of all the facts in the case.'
This is Money highlighted that the FCA was investigating arrears handling in August after Lloyds Banking Group admitted it had set aside £215million to pay redress to borrowers who had been mistreated after falling behind on their mortgage.
A spokesman for Lloyds Banking Group said that this redress was 'completely unrelated' to today's announcement by the FCA.
He added: 'The FCA consultation today relates to an industry mortgage issue. We are taking time to carefully consider this guidance and will formally respond to the consultation.'
In its August results statement, Lloyds Banking Group admitted it had put aside £215million to compensate mortgage customers who had been let down by the bank after they'd fallen behind on their mortgage payments.
The charge for the half-year included £215million 'in respect of arrears related activities on secured and unsecured retail products'.
The results statement said: 'In May, the FCA informed the group that it was commencing an investigation in connection with the group’s mortgage arrears handling. At this stage it is not possible to make an assessment of the outcome of this ongoing
Sam: 21st Oct 2016 14:01:00
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