Westpac is compensating 13,000 owner-occupier loan customers $11 million after a systems error failed to switch interest-only mortgages to principal and interest.
The Australian Securities and Investments Commission (ASIC) revealed the bank's systems had failed to automatically switch interest-only home loans to principal and interest repayments at the end of the specified interest-only period.
It said the "long-standing error" had affected some interest-only home loan customers since as early as 1993.
Westpac said most of the affected loans had an interest-only period that expired between 2009 and 2016.
It will refund and/or provide an interest rate discount to the 13,000 owner-occupiers.
"This remediation has been designed so that customers pay no more interest over the life of the loan than they would have if the system error had not occurred," ASIC said.
The watchdog promised to monitor the remediation program to "ensure it is meeting consumer requirements".
"All banks should be reviewing their systems to ensure that they minimise the chance of any such errors occurring, and that any risks to customers are identified early. If past errors are identified, remediation needs to be timely, transparent and effective," ASIC acting chair Peter Kell said in a statement.
Westpac is contacting affected customers and said it expected the remediation process would take 12 months to complete. St.George, Bank of Melbourne, BankSA and RAMS customers are not affected.
"We apologise unreservedly for the error and have now automated the switching process to ensure it does not happen again," Westpac's head of consumer bank George Frazis said in a statement.
It did not provide detail on the system error.
Westpac is yet to come to agreement with ASIC on appropriate remediation for its investor interest-only loan customers that were affected by the same system error.
ASIC is currently undertaking a targeted review of other major lenders to check for similar issues.
