Clydesdale, which is owned by National Australia Bank, has agreed to compensate all those who underpaid on their mortgages as a result and write to other affected customers. This process has been agreed with the FCA, which has an objective to secure an appropriate degree of protection for consumers.
In April 2009 Clydesdale discovered an error in how it had calculated mortgage repayments for customers with variable rate mortgages. As a result of the error, incorrect repayments were made on over 42,500 customer accounts. Of these, approximately 22,000 accounts were left with shortfalls because customers made repayments that were insufficient to repay their mortgages by the end of the agreed terms. The calculation error was corrected in 2010.
These 22,000 customers then faced unexpected increases in their monthly repayments both to correct the error and to make up for their shortfalls. In total there was a £21.2 million shortfall in Clydesdale mortgages, with customers who underpaid left with mortgage balances higher than they should have been. The shortfalls range from under £20 to over £18,000, with an average of £970.
After discovering the error, Clydesdale contacted customers and set up a dedicated call centre to deal with any queries. However, in seeking repayment from customers as a priority, it wrongly sought to balance its own commercial interests against the requirement to treat customers fairly.
Letters the bank sent to customers suggested that they had no alternative but to bring their repayments up to date. Many customers, however, could have rejected demands to repay the shortfalls caused by Clydesdale's calculation errors. This lack of clarity was compounded by poor instructions to Clydesdale's call handlers for dealing with customers who called to complain.
Tracey McDermott, the FCA's director of enforcement and financial crime said of the fine:
"For most people mortgage payments are their biggest monthly outgoing and we all budget on the assumption that the information our mortgage lender gives us about what we need to pay is correct.
Here Clydesdale failed in that basic duty and, when it discovered the problem, sought to pass all of the consequences on to its customers - expecting them to find the money to remedy mistakes which were entirely of Clydesdale's making.
Firms must put the interests of customers at the heart of their business if we are to restore trust and confidence in financial services. Clydesdale is today paying the price for its decision to put its bottom line ahead of the need to ensure its customers were treated fairly."
In cases such as this the FCA could require a firm to contact customers and provide redress to those who respond and can show they lost out. The scheme volunteered by Clydesdale goes further; in particular all customers who were left with shortfalls as a result of the error will be automatically compensated. Those who overpaid can make a claim for compensation if they believe they suffered financially as a result of Clydesdale's error.
The £8.9 million fine was calculated using the penalty regime that the FCA applies to breaches committed from 6 March 2010, which was introduced in part to increase fine levels. The fine would have been higher were it not for Clydesdale's redress scheme. The scheme, which is welcomed by the FCA, should minimise further inconvenience to customers. Clydesdale also received a 30% discount for settling at an early stage of the enforcement process.
Clydesdale will now write to all customers who were affected by the error who did not receive compensation following the bank's original communication exercise. Mortgage-holders do not need to do anything until they are contacted by Clydesdale.
Clydesdale Bank and Yorkshire Bank have responded as follows:
This resulted in some mortgage payments being incorrectly recalculated whenever interest rates changed. Although the error had existed since 2005, it had little impact on customers before 2008 as interest rates moved up and down. When interest rates moved steadily downwards from 2008, the error began to materially impact mortgages. For some customers, this meant their payments were less than the minimum required to repay their mortgage over the agreed term. The system was corrected, and, after we wrote to customers, payments were increased to make up any shortfall from April 2010.
David Thorburn, chief executive, said:
"I am very sorry that this wasn't handled as it should have been. We should have made it clear at the time that this was entirely our fault and that some customers may be entitled to compensation.
Our priority is to fix this for customers as quickly as possible and they will each receive a letter explaining how we will make this right for them. In addition, an automatic compensation process for customers who underpaid as a result of our error is in place to provide immediate resolution for over 14,000 customer accounts.
Those customers will receive a full apology and confirmation of their refund within the next 48 hours. We will work with the remaining customers, whose cases are more complex, to discuss how they may have been affected and what their options are. The vast majority will hear from us by mid-October.
We have voluntarily agreed to take action that will go over and above that required by the FCA. While the fine has been calculated under the new and more stringent penalty regime, we are grateful that our efforts to put this right for customers quickly have been recognised and the penalty reduced."
Customers with one of the over 42,500 accounts affected by the original payment calculation issue need take no immediate action and will receive a letter explaining the next steps. Where our error resulted in a capital shortfall on a customer mortgage, the Bank will write off the entire shortfall, make a payment representing interest costs and recalculate the reduced payment amount where appropriate. The average shortfall to be written off is £970. In total, there was a £21.2 million shortfall in customer mortgages.
The total cost of providing customer redress, including the £8.9 million fine imposed by the FCA, is expected to be approximately £42 million, of which the vast majority had already been provided for by the end of June 2013.
