* FCA: banks sometimes add arrears to mortgage capital sum
* Industry group says 750,000 customers could be affected
* Mortgage lenders to work out compensation by end June ‘17 (Adds industry reaction)
By Huw Jones
LONDON, Oct 19 (Reuters) - Britain’s mortgage lenders face compensation claims from hundreds of thousands of customers for incorrectly handling payment arrears, the country’s financial regulator said on Wednesday.
The Financial Conduct Authority (FCA) said lenders were sometimes automatically adding arrears to the capital sum of the mortgage and also asking for a separate arrears payment.
This meant customers already in financial difficulties were temporarily overpaying on their home loans, facing extra fees and charges, and further damaging their credit rating.
The FCA published draft guidance on Wednesday for firms to work out compensation for customers by the end of June 2017.
An industry group set up by the FCA and representing 66 percent of Britain’s mortgage market estimated that 750,000 customers could be affected, with compensation potentially running to more than a hundred pounds each.
“Firms should start identifying affected customers immediately and not wait until the finalised guidance is published,” Jonathan Davidson, the FCA’s director of retail supervision, said in a statement.
Affected customers will be contacted by their lender, and no penalties are planned at the moment, but this could change if proper compensation is not paid.
Barclay’s declined to comment before studying the FCA’s consultation paper, while HSBC said it does not automatically add arrears to a customer’s capital sum or charge any fees for being in arrears.
“Any payment plans on arrears are agreed with a customer based on affordability and sustainability,” an HSBC spokesman said.
Lloyds, one of the country’s biggest mortgage lenders, said it was taking time to carefully consider the FCA guidance.
The Council of Mortgage Lenders (CML), an industry body, said lenders acted in good faith that their practices were in line with the rules.
“Lenders are fully committed to ensuring that they review past cases appropriately,” the CML said in a statement.
“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.”
Typically, arrears are bundled into the capital sum automatically when there is a “trigger” point, such as a change in interest rates.
The Bank of England’s rate cut in the summer means more customers could be affected than the 750,000 initial estimate.
The problem came to light following a court ruling in 2014 that Bank of Scotland unfairly double billed customers who fell into arrears on their home loans.
Following this ruling, the watchdog found that some banks had failed to check their IT systems were compliant with the FCA’s rules on handling arrears.
Some lenders had been unaware they were double billing. (Additional reporting by Sinead Cruise and Andrew MacAskill,; Editing by Mark Potter and Susan Fenton)