The City watchdog has fined Yorkshire Building Society £4.135m for failings when dealing with its mortgage customers experiencing payment difficulties.
The Financial Conduct Authority said the failures between October 2011 and July 2012 led to significant delays in determining the most appropriate payment solutions.
The Leeds and Bradford-based mutual has started repaying £8.3m to its customers.
The FCA said YBS properly viewed repossession as a last resort but failed to recognise that delays in reaching long term payment solutions meant that some customers incurred increased fees and associated interest.
YBS has already started to refund these customers.
Tracey McDermott, FCA director of enforcement and financial crime, said: “Customers in financial difficulty need to be treated fairly and sensitively.
“Firms must ensure that they are taking into account the particular circumstances affecting customers who find themselves in difficulty.
“Firms need to be dealing with these customers proactively, without delays, in order to ensure they are not losing out.
“By allowing cases to drift without agreement, YBS’s actions meant that customers in vulnerable circumstances risked falling into further financial difficulty.”
The FCA investigation found that insufficient training and fragmented guidance meant that call handlers did not consistently probe customers’ circumstances and identify the cause of their problems.
These issues were not spotted because weaknesses in checking procedures and management information, and a failure to identify customer complaints, meant that YBS management was deprived of information that may have highlighted poor treatment of customers, said the watchdog.
In September and October 2012, the FSA wrote to YBS highlighting serious failings in the monitoring and oversight of cases discovered during a previous visit.
The FCA ordered a “skilled person review” in May 2013 and said this found that in 64 out of 87 cases considered, customers were not treated fairly and in 52 of these cases customer detriment could be identified.
The watchdog said YBS agreed, voluntarily and proactively, prior to the enforcement investigation commencing to refund all mortgage arrears fees, plus associated interest, charged to customers since January 2009.
The redress scheme is currently underway and approximately 33,900 customers will be repaid a total of £8.4m.
YBS agreed to settle at an early stage of the FCA investigation and qualified for a 30 per cent discount.
Chris Pilling, chief executive at Yorkshire Building Society, said: “As a mutual organisation owned by our members, the service we give to customers is fundamental to us and we are very sorry for letting them down.
“I hope the refunds we have voluntarily given to customers and the changes we have made demonstrate how seriously we have taken this issue and our commitment to put things right.
“We believe the improvements and investment we have made in this part of our business will deliver the level of service our members expect of us and our focus on achieving that is absolute.”