The Financial Conduct Authority has hit Clydesdale Bank with a £8.9m fine for miscalculating repayments on over 42,500 mortgages.
Britain's financial consumer watchdog said in a statement that failed to inform its customers clearly of their rights after the bank miscalculated mortgage repayments that left approximately 22,000 accounts with shortfalls by the end of the agreed terms.
The FCA approved the a plan by Clydesdale, which is owned by National Australia Bank, to compensate all those who underpaid on their mortgages as a result and write to other affected customers.
"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," said Tracey McDermott, the FCA's director of enforcement and financial crime.
"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."
The FCA said that in April 2009 Clydesdale discovered an error in how it had calculated mortgage repayments for customers with variable rate mortgages and was then only corrected a year later.
The regulator said 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 £21.2m (€25.2m, $34m) shortfall in Clydesdale mortgages, with customers who underpaid left with mortgage balances higher than they should have been, it added.
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," said the FCA.
"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."
The regulator ruled that Clydesdale will now have to write to all customers who were affected by the error who did not receive compensation following the bank's original communication exercise.