This is the first time the FSA has fined a mortgage lender in relation to its lending processes and it sends a clear signal that lenders' management must ensure they have proper control and monitoring systems in place so that they treat all their customers fairly and prevent them suffering detriment.
The customers affected were those whose mortgage contracts were subject to a "retention" clause whereby a sum of around £3,000 was withheld from the mortgage advance as a condition of the mortgage loan - typically where the borrower was required to carry out specified repairs to the mortgaged property. The firm's mortgage terms and conditions provided that these retention monies would be retained for six months and that during this time the borrower would be charged interest on the full mortgage loan including the retention monies. After six months the retention monies and accumulated interest should have been released to the borrower or applied to reduce the outstanding mortgage loan.
The firm's terms and conditions did not make it clear to all customers that they would be charged interest on the full mortgage loan, including the retention monies, during the six month retention period. Further, due to inadequate systems and procedures at the firm, retention monies and accumulated interest were not always paid to borrowers or applied to their outstanding mortgage loan after six months and the firm continued to charge some borrowers interest on retention monies beyond the six month retention period. When a mortgage with an outstanding retention was redeemed, the firm did not always deduct the retention monies and accumulated interest from the outstanding mortgage loan. This resulted in some borrowers overpaying the firm when redeeming their mortgage.
The firm identified retentions failings in 2004, but despite this the failings persisted over a significant period of time and the firm did not promptly remediate all customers.
FSA Director of Enforcement Margaret Cole said: "The firm's failings were serious because a large number of borrowers, including some with impaired or non-standard credit profiles, were put at risk of financial loss. The firm identified the systems and control failings in 2004, but despite internal recommendations that improvements be made, no corrective action was taken for more than two years. I emphasise that we expect high standards by lenders in their administration of their mortgage book."
In setting the fine the FSA has taken account of the following mitigating factors. The firm:
* reported the issue to the FSA;
* conducted a remediation programme to ensure that customers who suffered financial loss as a result of the retentions failings were properly compensated;
* commissioned an external review of the issue and shared the report with the FSA;
* has stopped using the retentions mechanism.
The firm has also reviewed non-regulated mortgage contracts with retention clauses entered into before 31 October 2004 when mortgage regulation began. In total, including both regulated and non-regulated mortgage contracts, it has paid 5,245 customers redress of £7.04 million in relation to their mortgage retentions.
The firm agreed to settle an early stage of the proceedings and therefore received a 30% reduction in penalty. Were it not for this the FSA would have sought to impose a financial penalty of £1.6 million on the firm.
