Automatic capitalisation of mortgage arrears: FCA proposed remediation framework

In guidance consultation GC16/6, the FCA has identified that some mortgage firms have automatically included customers’ arrears balances within their monthly mortgage payments. Even if inadvertent, it considers this to be "automatic capitalisation" and a likely breach of a rule (introduced in June 2010) that firms must not automatically capitalise a payment shortfall where the impact on the customer would be material.

Capitalisation is permitted in any case when the individual circumstances of the customer are considered and with the customer’s agreement.

As the arrears have not been extinguished, firms are collecting them over the remaining mortgage term through a higher monthly payment. Firms are also continuing to pursue the arrears through their collections processes, treating them as immediately payable. The FCA says that this automatic inclusion of arrears balances in the monthly payments lacks transparency and can lead to harm. It has written a case study showing how the practice may affect customers.

Proposed framework to put things right

GC16/6 sets out a proposed (non-mandatory) remediation framework. The framework envisages that any compensation will be credited to a customer's mortgage balance or, if the account is closed, paid to the customer.

Firms are also expected to make changes to policies, procedure and systems to ensure the FCA requirements are met (and amend terms and conditions where necessary). This includes moving to “Method 2” when calculating a new monthly payment for customers in arrears, where the lender ring fences any arrears of interest and capital so that the new monthly payment includes any fees and charges, but does not include any arrears of interest and capital.


The FCA proposes that firms should notify customers who are in scope for remediation before 30 June 2017 and complete remediation by 30 June 2018.

Next steps

The consultation closes on 18 January 2017. We would encourage firms affected by the FCA's proposals to send in their responses, including on the FCA's views on current/past practice in respect of mortgage arrears. It will also be important to focus on finding a constructive way forward on the use of "Method 2" mortgage payment calculations; the method will need to incorporate a measure of flexibility to allow for firms' different systems operating differently. The finalised guidance is due to be published in Q1 2017.

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