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* 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 facecompensation claims from hundreds of thousands of customers forincorrectly handling payment arrears, the country's financialregulator said on Wednesday.
The Financial Conduct Authority (FCA) said lenders weresometimes automatically adding arrears to the capital sum of themortgage and also asking for a separate arrears payment.
This meant customers already in financial difficulties weretemporarily overpaying on their home loans, facing extra feesand charges, and further damaging their credit rating.
The FCA published draft guidance on Wednesday for firms towork out compensation for customers by the end of June 2017.
An industry group set up by the FCA and representing 66percent of Britain's mortgage market estimated that 750,000customers could be affected, with compensation potentiallyrunning to more than a hundred pounds each.
"Firms should start identifying affected customersimmediately and not wait until the finalised guidance ispublished," Jonathan Davidson, the FCA's director of retailsupervision, said in a statement.
Affected customers will be contacted by their lender, and nopenalties are planned at the moment, but this could change ifproper compensation is not paid.
Barclay's declined to comment before studying theFCA's consultation paper, while HSBC said it does notautomatically add arrears to a customer's capital sum or chargeany fees for being in arrears.
"Any payment plans on arrears are agreed with a customerbased on affordability and sustainability," an HSBC spokesmansaid.
Lloyds, one of the country's biggest mortgagelenders, said it was taking time to carefully consider the FCAguidance.
The Council of Mortgage Lenders (CML), an industry body,said lenders acted in good faith that their practices were inline with the rules.
"Lenders are fully committed to ensuring that they reviewpast cases appropriately," the CML said in a statement.
"It is very unlikely that any customer in the past hasexperienced repossession who would not otherwise have done so ifa different arrears calculation method had been used."
Typically, arrears are bundled into the capital sumautomatically when there is a "trigger" point, such as a changein interest rates.
The Bank of England's rate cut in the summer means morecustomers could be affected than the 750,000 initial estimate.
The problem came to light following a court ruling in 2014that Bank of Scotland unfairly double billed customers who fellinto arrears on their home loans.
Following this ruling, the watchdog found that some bankshad failed to check their IT systems were compliant with theFCA'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)
