Mortgage calculation errors—lessons from the Clydesdale saga

Firms need to ensure they put the interests of customers ahead of commercial interests where detriment may arise as a result of the firms’ actions. The recent FCA action against Clydesdale suggests there may need to be a recalibration when weighing up enforcement risk versus pursuit of profit.


Clydesdale, which operates under the Clydesdale Bank and Yorkshire Bank brands, is a subsidiary of National Australia Bank. The Financial Conduct Authority (FCA) has fined Clydesdale £8,904,000 for failing to treat customers fairly in relation to mistakes made by the bank in relation to mortgage repayments.

What is the background to the enforcement action?

In April 2009 Clydesdale discovered an error in how it had calculated mortgage repayments for customers with variable rate mortgages. The error came about as a result of Clydesdale’s implementation of a new mortgage repayment calculation system, which caused monthly interest and capital payments to be calculated incorrectly whenever there was an interest rate change.

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.

If the error was corrected, why did the FCA take action?

Guidance from the Financial Ombudsman Service (FOS) produced in 2001 (and therefore relevant at the time the mistake was discovered) described its approach to determining complaints involving ‘mortgage underfunding’. The guidance covered situations where the borrower had made a regular repayment quoted by the lender, but the lender (in this case Clydesdale) had quoted too low a figure. It went on to state that where the lender was entirely at fault it should write off the shortfall that had built up on customer accounts.

While FOS guidance is not strictly binding, the Dispute Resolution Manual of the FCA’s Handbook indicates that FOS guidance and decisions concerning similar complaints were factors that may have been relevant in the assessment of any
complaints that Clydesdale received from customers. Nevertheless, Clydesdale decided not to follow the approach set out in the FOS guidance and sought to recover the shortfall.

For example, letters sent by Clydesdale to customers who had made underpayments gave those customers the impression they had no option but to cover the shortfall in full, even though, depending upon their individual circumstances, they might not necessarily have to cover any capital shortfall arising from the calculation error.

When customers called Clydesdale’s customer services team to discuss their repayments, the team was not instructed to enquire proactively into customers’ individual circumstances and failed to make it clear to all customers that they might not necessarily have to cover their capital shortfalls. Instead customers’ individual circumstances were only taken into account if the customers themselves indicated that they may have suffered detriment.

Why is this enforcement particularly noteworthy?

The FCA has taken the unusual stance of basing its finding in part on the fact the FCA considers that ‘most’ customers who accrued capital shortfalls would have spent the ‘savings’ they made each month as a result of the error and, accordingly, it would have been unfair to require those customers to make good the capital shortfall. The FCA has not put forward any empirical evidence that most customers had spent the money that would otherwise have been paid to the bank in mortgage payments had mistakes not been made.

In this case Clydesdale drew up a scheme, which would automatically compensate all customers who were left with shortfalls as a result of the error, regardless of whether such customers suffered any detriment. In total, there was a £21.2m shortfall in Clydesdale mortgages, all of which will now be written off by Clydesdale. The FCA has made it clear that were it not for Clydesdale’s proactive steps to create a redress scheme, the fine would have been considerably higher. Clydesdale also received a 30% discount for settling at an early stage of the enforcement process.

In seeking to recover the shortfall in payments from customers, Clydesdale was seeking restitution of the financial gain its customers received. If Clydesdale had properly taken steps to discover if customers had received the financial benefit in good faith (ie they were unaware of the shortfall) and then altered their circumstances as a result of that (ie there is a ‘change of position’ defence available) then such customers would not have needed to repay the benefit. If some customers’ position had not changed as a result of receiving the benefit, the bank may have been able to claw back some of the shortfall and avoid the significant financial penalty imposed by the FCA (although the costs and reputational impact of a case by case check could be too much for the bank, so making a total payout under the scheme could be viewed as being reasonable).

Should other firms be concerned about the action taken by the FCA?

Many firms may view enforcement action and possible fines as a normal risk of doing business. However, the frequency and value of fines meted out by the FCA is on the increase, so perhaps this approach should be reviewed. Firms may put commercial interests before those of their customers and take the commercial view that the possibility of facing enforcement action is worth the risk in the pursuit of profit. The FCA is likely to take a dim view of such a culture if the firm does face enforcement in the end.

If it becomes apparent that a firm is proposing to take steps which put its commercial interests ahead of its customers’ interests, it would be advisable to reconsider, as the costs in putting in place remedial action, as well as the substantial fines that could be imposed, could be significantly higher than the initial commercial gain.

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