Chapter 12 of the Mortgages and Home Finance Conduct of Business (MCOB) sourcebook in the FCA Handbook is designed to ensure that mortgage providers do not impose unfair or excessive charges on borrowers. More specifically MCOB 12.4.1BR sets out how firms are expected to allocate payments received on accounts with a payment shortfall. This is to ensure that payments are allocated in a way that minimises the time taken to pay off the arrears.

Following a recent review by the FCA of a number of firms’ allocation of payments processes, the FCA has published a consultation paper, in an attempt to address the identified divergent practices among firms.

In its consultation paper, the FCA two changes to MCOB:

  • Amending wording of MCOB 12.4.1BR. If this proposal goes ahead, this rule will read as follows: “When a customer has a payment shortfall in respect of a regulated mortgage contract, a firm must ensure that no part of any payment received in respect of that contract is allocated towards paying interest or charges incurred because of a payment shortfall before the balance of the payment shortfall has been cleared.”
  • An amendment to the Glossary clarifying the definition of a ‘payment shortfall’ to make it clear that interest (on missed payments), fees and charges and ancillary items do not form part of a payment shortfall. Also, if a payment shortfall has been capitalised in accordance with the rules, it no longer counts as a payment shortfall.

The FCA believes the proposed amendments will provide more clarity and help ensure an appropriate level of consumer protection.

The consultation will close on 10 August 2016.