The City watchdog has fined GE Money Home Lending £1.12 million for overcharging hundreds of sub-prime borrowers by a total of £2.3 million.

This is the first time a mortgage lender has been fined by the Financial Services Authority (FSA) since it started regulating home loans in 2004, although it has fined more than ten mortgage brokers this year. In May, it fined Thinc, a group of financial advisers, £900,000 for failing to adequately advise customers about sub-prime mortgages.

The original fine levied on GE Money was £1.6 million but was reduced by 30 per cent because GE Money agreed to settle at an early stage of the FSA's investigation.

The FSA said the fine sent a "clear signal" to lenders that they had to treat their customers fairly.

GE Home Money Lending is the 15th biggest mortgage lender with a 1.1 per cent share of the market, according to the most recent figures from the Council of Mortgage Lenders.

The FSA said that GE Money had overcharged customers who had a “retention” clause in their home loan contract, where a sum of around £3,000 was withheld from the mortgage advance. This money should have been paid to the customer after six months but, in many cases, this did not happen and some borrowers never received the money, even when they paid off their loan in full.

The FSA said that 684 homeowners had lost £2.3 million because of these errors, although this money has been repaid, but it highlighted that the problems were first identified four years ago, but nothing was done to address them until 2006.

It added that GE Money has also repaid borrowers who were affected before mortgage regulation began in 2004, handing over £7.04 million to nearly 5,500 customers.

Margaret Cole, the FSA's director of enforcement, said: “The firm’s failings were serious because a large number of borrowers, including some with impaired or non-standard credit profiles, were put at risk of financial loss.

"The firm identified the systems and control failings in 2004 but, despite internal recommendations that improvements be made, no corrective action was taken for more than two years. I emphasise that we expect high standards by lenders in their administration of their mortgage book.”

Colin Shave, Chief Executive Officer of GE Money Home Lending apologised to customers. "We regret the events which led to this situation and, although the number of affected borrowers was small compared to our overall customer base, we sincerely apologise to those who were affected," he said.