payday lending: pieces of the picture of pieces lending: | payday Financial Ombudsman Service insight report insight Service Ombudsman Financial payday lending: pieces of the picture Financial Ombudsman Service insight report © Financial Ombudsman Service Limited, August 2014
This report was prepared by Mike Harris, head of policy insight, and Jo Thornhill, policy insight manager, in collaboration with the ombudsmen and adjudicators of the ombudsman service’s consumer credit team, and with support from the ombudsman’s policy, business information and communications teams. foreword
The ombudsman received 794 complaints about payday loans last year, an increase of 46% on the previous year. Despite the increase, we are very concerned that the number of payday loan complaints we see does not reflect the level of public concern about these products. We decided to take a closer look at the complaints we do receive to get a better understanding of what is going wrong and to see what lessons might be learned and shared. Running through many of the We are firm believers that What we have seen is quite complaints we reviewed was complaints are a great distressing. Some of the repeated evidence of poor barometer for how any problems consumers have administration and lenders business is performing, encountered will be familiar displaying inadequate customer and that the opportunity following the intense media care towards those struggling to learn from customers scrutiny of payday lending financially. While we have seen who are dissatisfied can over the last couple of years some examples of lenders doing help prevent things that – unhappiness with the high the right thing for consumers have gone wrong in the cost of credit, unfair or multiple in very difficult circumstances, past from going wrong charges, and the excessive in too many cases the treatment again in the future. use of continuous payment of consumers was alarming. authorities to take money from As a service, we are Our review uncovered a very customers’ accounts, sometimes determined to play a full mixed picture of good, leaving them unable to pay for and active role in that effort. bad and – at the extreme food or their bills. The Financial Looking ahead, I am determined end – appalling treatment of Conduct Authority has acted in that the ombudsman service borrowers in financial difficulty. recent months to address these seeks new ways to share We heard from many vulnerable issues. We will report on any the insight we gain from the consumers who had been unable systemic breaches of the new hundreds of thousands of to set up a repayment plan with rules that we see. financial services complaints their lender, or who had been we tackle each year. aggressively chased for debt. This report is the first step This is completely unacceptable “ Our review uncovered in that continuing drive. – industry practice in this area good, satisfactory I hope you find it useful simply has to improve. and – at the extreme and informative. end – some appalling We will not hesitate to refer to
treatment of borrowers the regulator those businesses in difficulty.” that ignore their obligations. Caroline Wayman, But we will also work with the Caroline Wayman, chief ombudsman chief ombudsman and industry to help embed good chief executive practice as well as report bad.
Financial Ombudsman Service insight report Page 1 contents “settling disputes, without taking sides … ”
“… using our insight to help prevent future problems.” chapter 1 introduction and executive summary 3 The Financial Ombudsman chapter 2 the payday lending enquiries and complaints 9 Service was set up by law to we received in 2013/14 resolve individual disputes between consumers and chapter 3 a closer look: analysing a sample of the financial businesses – complaints received in 2013/14 15 fairly, reasonably, quickly and informally.
chapter 4 why consumers had brought complaints 21 We can look at complaints about payday loans about a wide range of financial and money matters – chapter 5 complaints about fraud 25 from insurance and mortgages to investments and credit.
chapter 6 complaints about damage to credit records 29 If a business cannot resolve a consumer’s complaint, we can chapter 7 complaints about debt-chasing, step in to settle the dispute. poor administration and customer service 35 We are independent and impartial. When we decide a chapter 8 complaints about continuous payment authorities 41 complaint we look carefully at both sides of the story and chapter 9 complaints about high costs and charges 45 weigh up all the facts. If we decide a business has chapter 10 the experience of vulnerable consumers 49 treated a consumer fairly, we will explain why. But if we chapter 11 referral rights and post-decision contact 59 decide the business has acted wrongly – and the consumer chapter 12 live issues 65 has lost out – we can order matters to be put right.
chapter 13 conclusions 71 We are constantly looking for ways to improve the way we annex 1 about us 75 resolve cases, and we aim for the highest professional standards. references 77 We believe it is essential to learn lessons from dissatisfaction and disputes. So we have an important role in sharing the insights that can be gained from the complaints we see. This gives consumers greater confidence in financial services and helps businesses prevent future problems by learning from situations where things have gone wrong.
Page 2 payday lending: pieces of the picture chapter 1
introduction and executive summary
Financial Ombudsman Service insight report Page 3 1 introduction and executive summary
background At the point of applying for a In June 2010 the Office of high-cost short-term loan, many Fair Trading (OFT), the former Payday lending has grown consumers are in a difficult, regulator of consumer credit, rapidly in recent years, but the and deteriorating, financial published a report on high-cost first UK payday lenders have situation.6 As one ombudsman credit and found significant been around for more than a put it during our research, for failings. A further OFT report decade. Expansion has been many, taking out a payday loan published in March 2013 found fuelled by payday lenders from is in itself a ‘distress purchase’. widespread non-compliance the United States looking to with the Consumer Credit Act new markets and countries for scrutiny and voluntary codes of conduct opportunities in response to by businesses. By June 2013, tightened domestic regulation, Payday lending has the OFT had referred the and also by diversification by consequently become industry to the Competition UK lenders offering other types increasingly controversial, Commission (now the CMA), of credit product.1 attracting significant media, which published provisional political and regulatory findings in June 2014 and made According to the Competition attention. Consumer groups, numerous recommendations and Markets Authority (CMA), debt advice charities and to improve competition in the growth in the payday lending others have been expressing sector. Parliamentary scrutiny sector was particularly strong concern for many years about has come in the form of an between 2010 and 2012.2 In the payday lending business investigation by the Business, 2013, it is estimated that payday model, the high cost of credit, Innovation and Skills Select lenders issued more than 10 poor business practice and Committee, whose December million loans, to 1.6 million lenders’ treatment of consumers 2013 report made calls for more payday loan customers, with a in difficulty. rigorous affordability checks, a total value of £2.5 billion.3 cap on ‘rollovers’ (when a loan is 7 Clearly, the growth in supply “ some 5 million deferred) and health warnings is only one side of the story; people in this country to appear on advertising. payday loan businesses use payday loans. The Financial Conduct Authority could only flourish if there (FCA) assumed responsibility was demand. UK consumers The situation is for consumer credit regulation are heavily indebted.4 becoming too big from 1 April 2014, and quickly Recent research suggests to ignore.” introduced new rules to address that almost half the population Justin Welby, issues of particular public are now suffering some form Archbishop of Canterbury House of Lords, 20 June 2013 concern, including limiting the of financial insecurity.5 Payday number of times payday loans lending has filled a gap in the can be rolled over, and the market, particularly for those number of times lenders may consumers with a poor credit unsuccessfully use a ‘continuous history who are excluded from payment authority’ (CPA).8 mainstream credit.
Page 4 payday lending: pieces of the picture The regulator is currently complaints The ombudsman service 1 conducting a thematic review often sees the hardest-fought of the payday lending market, Against this backdrop of disputes, which financial which will examine how lenders increased scrutiny, the businesses and consumers collect debts and manage number of consumers bringing have already tried and failed to borrowers in arrears. During its complaints about payday loans resolve themselves. Because investigations into the sector, to the Financial Ombudsman we sit ‘downstream’ of where the FCA has found that: Service has been rising year problems occur, our report on year. As chapter 2 sets out is not, cannot, and does not “… excessive charges for in more detail, the number of pretend to be, a commentary on high-cost short-term credit are new payday loan cases opened or analysis of the wider high- harming significant numbers by the ombudsman service cost short-term credit industry. of consumers. Many borrowers increased by 168% between But by looking in detail at the pay a high price for a loan March 2012 and March 2014 complaints consumers have that is of limited net benefit, (from 296 complaints to 794). brought to us, we hope our or makes their already difficult But despite this proportionately insight will complement what financial situation worse. steep increase, 794 remains others have observed, help Borrowers who have problems a relatively low number in the payday lending businesses repaying can end up owing context of our total casework understand more about the significantly more than they volume. We do not believe causes of consumer detriment originally borrowed.”9 our payday loan complaints in this market, and support caseload necessarily reflects the effective regulation. We also “ what we are scale of consumer detriment in anticipate that our findings will concerned about this market. be of interest to policymakers, consumer groups and the are the people who The payday loan market is set wide range of organisations frankly shouldn’t be for rapid and significant change. supporting consumers with lent to, who can’t The new regulatory regime and debt or money problems. afford the loans and the forthcoming price cap are who then get rolled expected to result in a number over and get pushed of current lenders leaving the ever further into a market.11 Others will look to debt cycle.” innovate or diversify into other product areas. The instability Martin Wheatley, Chief Executive, Financial Conduct Authority of the sector, the strengthening BBC 5Live, 1 April 2014 of regulatory oversight, and the continued growth in complaints, has prompted In July 2014 the FCA published a us to look in more detail at consultation paper on the payday cases we decide. capping the total cost of credit. The proposal is for a cap which will apply to all interest, fees and charges associated with high-cost short-term loans, and to prevent consumers being charged more than 100% of the original loan amount. The regulator estimates that the cap will benefit consumers in the form of lower prices, and reduce firms’ revenues by 42% (approximately £420 million).10 The cap will come into effect from 2 January 2015.
Financial Ombudsman Service insight report Page 5 1 executive summary the sample of complaints we Taking all observable features looked at in our research of complaints into account, This report presents the findings the most frequently-cited issues To deepen our understanding from the payday loan complaints were damage to credit records, of the issues underpinning the we have reviewed. It is the first poor customer service and poor payday lending complaints in a new series of insight reports administration. from the Financial Ombudsman we receive, we looked in detail Service, and brings together at a sample of 353 complaints complaints about fraud our statistical data on the that had been both opened payday lending complaints we and closed in 2013/14. In just over one in six (16%) of receive, a detailed look at a The sample included complaints the sampled cases the complaint sample of complaints received against 46 different businesses. was about a loan the consumer in the 2013/14 financial year, The age, gender and region of said they had not taken out. and qualitative interviews with the consumers represented in The headline result covers a ombudsmen and adjudicators the sample closely matched varied range of issues and involved in resolving payday the overall profile of those circumstances, from alleged cases. Our findings are complaining to the ombudsman identity theft and scams to fraud summarised below. about payday loans in 2013/14. perpetrated by someone known Many of the consumers in the to the consumer. While all sample had taken out previous payday loan complaints age groups can be vulnerable, payday loans, and there was handled by the ombudsman we found that younger evidence that over two-fifths service in 2013/14 consumers were more likely (42%) were in financial to complain about fraud than The ombudsman service hardship. Where it was older consumers: fraud was opened 794 complaints from possible to determine the the main reason for complaint consumers about payday date of the loans at the centre for 39% of those aged 18-24, lending in the 2013/14 of the sampled complaints, compared to 15% among the financial year, a 46% increase 72% were taken out between over-55s. on the previous year 2012 and 2014. (542 complaints). Of the complaints about damage complaints we resolved during why consumers had complained to credit records the year, we upheld 63% about payday loans in favour of the consumer. 12% of the sampled cases In addition to the formal As expected, consumers’ featured damage to credit files complaints we handle, reasons for bringing complaints as the principal reason for the ombudsman also continues to the ombudsman service were complaint. In all, complaints to receive a growing number of complex and varied. There was about damage to credit files enquiries from consumers about no single, dominant reason featured – to some extent – payday loans. In 2013/14, for consumer complaints. in a quarter (24%) of the the ombudsman service’s Rather, we found complaints sampled cases. Our review customer contact division to be multi-faceted, often revealed widespread consumer (CCD) fielded5,277 payday featuring a combination concern about the condition of loan-related enquiries of reasons for complaint. their credit files, but alsoa lack from consumers. The leading main reasons for of detailed understanding about complaint were allegations how credit reference agencies of fraud, poor administration, and personal credit files work. the unauthorised or unexpected Some consumers in our sample taking of funds, and the inability had deliberately taken out a to agree a debt repayment plan payday loan to improve their with a lender. credit score, and complained that they had been misled.
Page 6 payday lending: pieces of the picture complaints about debt-chasing, complaints about high payday lenders’ signposting 1 poor administration and costs and charges of consumers’ referral rights customer service At the start of the review, If a financial business cannot We saw considerable evidence we anticipated to find the high resolve a consumer’s complaint of consumers encountering cost of credit to be a prominent by the end of the next business problems agreeing a debt driver of consumer complaints. day, it must respond within eight repayment plan with their Our findings were surprising: weeks, writing to the consumer lender, or expressing in just 4% of the sampled cases to inform them of its decision. unhappiness at what they felt to were high interest rates cited as The ‘final response letter’ must be insensitive debt collection the main reason for complaint. explain that the consumer has practices. These issues were High charges were the main the right, if they are unhappy often interlinked. Complaints reason in 3% of the sample. with the decision, to refer their about poor administration by But this is only part of the complaint to the ombudsman lenders – such as loans paid picture – the cost of credit service. In just under half of the into the wrong account or the emerged as a background sampled cases, consumers were miscalculation or misapplication feature in a much higher given full referral rights. In the of fees and charges – also proportion of reviewed remaining cases, however, there featured prominently in our complaints. We also found was a mixed picture of practice. research. Poor customer service vulnerable consumers, In some cases, referral rights was a thread running through including those in financial had not been given at all, were many of the cases reviewed, hardship, to be more likely incomplete, misleading or late. often serving to exacerbate the to complain about high In a significant proportion, effect of other issues. charges and interest. a final response letter was not issued at all. We are complaints about continuous the experience of extremely concerned that payment authorities (CPAs) vulnerable consumers too many consumers are not being informed of their The unexpected or unauthorised A significant proportion of right to have their complaint taking of funds from an account complaints featured consumers independently reviewed. (via a continuous payment in obvious financial hardship, authority) was the third most struggling to repay their common main reason for debt. In all, over half of the consumers in our sample sample featured what might to bring a complaint to the be considered an indicator ombudsman. More than one in of possible vulnerability, ten of the cases we reviewed including financial distress, (13%) featured the alleged unemployment, disability, long- misuse of a CPA as the main term illness and mental health reason for complaint. It was issues. Vulnerable consumers also a subsidiary issue in other were more likely to have rolled cases: when all features of over and topped up their loans, complaints were considered, and were more likely to have unhappiness about the use loan debts outstanding at of CPAs were observable in the point they brought their a fifth (19%) of cases. complaint to the ombudsman. Businesses’ treatment of vulnerable consumers varied. We saw evidence of both good and bad practice. Where bad practice did occur, however, it often caused a rapid escalation of the consumer’s debt problem.
Financial Ombudsman Service insight report Page 7 1 live issues We remain extremely concerned • Work with credit reference by the quality of businesses’ The payday loan industry is a agencies to ensure that final response letters, and dynamic and fast-paced market, consumers’ credit files are the patchy way in which some with practice evolving against a accessible, transparent and lenders provided consumers backdrop of tightened regulation easy to understand. More with appropriate referral rights and considerable public needs to be done by industry to the ombudsman. There must scrutiny. Having completed our and credit reference agencies be no unnecessary barriers review of a sample of complaints to improve clarity and build between consumers and their received in the last financial consumers’ understanding entitlement to have complaints year, we conducted follow-up in this area. It is particularly independently reviewed. interviews with ombudsmen important for those who have and adjudicators working on what can businesses do? experienced impaired credit in the past. the most recent cases to take • End poor administration. account of emerging issues. Lenders should not be causing consumers can make things Those interviewed said the their customers undue trouble better by: apparent unaffordability of and upset because of poor payday loans at the point of sale systems and process. Putting • Seeking debt help early. It is was a growing cause of concern. resources into improving this easy for debts to spiral out of We are seeing a big increase in area should reap rewards in control quickly. Consumers the number of enquiries from customer satisfaction. who experience problems consumers about problems with their loan should make Make customers central to the with credit broking services. • their lender aware as soon as business. If a customer feels Ombudsmen and adjudicators possible. Lenders can freeze the need to raise an issue also reported a shift in emphasis interest and charges and set with a business, the business away from the ‘traditional’ up a reasonable repayment can often stop dissatisfaction 30-day payday model towards plan. Consumers can speak to escalating by listening and new loan products. their bank as well as creditors trying to put things right early. – the bank can cancel a CPA, conclusions • Make sure consumers know for example. their rights. Full ‘referral Not being afraid or ashamed Our review of payday lending rights’ are still not being • to complain. The ombudsman complaints found many recurring provided consistently. service is here to help and and interlinked themes. The ombudsman service can guide people through the More needs to be done to is working with businesses process. improve public understanding to raise standards in final of how credit systems operate, response letters and will • Getting free and independent though this is an issue that continue to flag poor debt advice. Debt advice extends well beyond payday practice to the FCA. charities, such as StepChange, can help, or get in touch lending. The complaints we Help vulnerable consumers. • with the ombudsman. reviewed revealed repeated Some consumers find We can guide consumers evidence of lenders displaying themselves in considerable towards those who can sloppy administration or financial difficulty. It is in help them get on top of demonstrating little concern everyone’s interest to work debt problems for free. for customer care. This simply together to find solutions, The Money Advice Service isn’t acceptable. Our review such as setting up viable debt also has information and also gives us cause for repayment plans, rather than advice to help consumers get concern about the treatment ignoring the problem and their finances back on track. of borrowers in financial continuing to chase for debt. difficulty, too many of whom were treated unsympathetically.
Page 8 payday lending: pieces of the picture chapter 2
the payday lending enquiries and complaints we received in 2013/14
Financial Ombudsman Service insight report Page 9 2 the payday lending enquiries and complaints we received in 2013/14
This chapter details the number of enquiries and complaints about payday lending handled by the ombudsman service in the financial year 2013/14, the profile of those consumers who contacted us, and how the volume of enquiries and complaints has grown over recent years.
snapshot • The ombudsman service opened 794 consumer complaints about payday lending in the 2013/14 financial year, a 46% increase on 2012/13 (542 complaints). In total, we resolved 660 payday lending complaints, upholding 63%. • 60% of payday loan complaints were brought by men, and 39% by women. • Payday loan complaints were most likely to be brought by consumers aged under 35 (47%) and by consumers based in London (18%). • While the number of payday loan complaints remains small relative to the ombudsman service’s overall caseload (we received a total of 512,167 new complaints in 2013/14), we have been receiving a growing number of enquiries from consumers to our helpline. • Since January 2009, we have received 12,084 enquiries about payday lending from consumers, with 5,277 (44%) of these coming in the last financial year alone.
consumer complaints about figure 1: new payday loan cases 2010 - 2014 794 payday lending in 2013/14 800 700 The ombudsman service opened 794 new payday loan complaints 600 542 in the last financial year, a sharp 500 increase (46%) on 2012/13, as 400 figure 1 shows. The number of 296 300 consumers complaining to the ombudsman about aspects of 200 payday lending appears to be on 100 59 33 a clear upward trajectory, albeit 0 from a low base. Year ended Year ended Year ended Year ended Year ended 31 Mar 2010 31 Mar 2011 31 Mar 2012 31 Mar 2013 31 Mar 2014 sources: Financial Ombudsman Service, Annual Review 2012/13, and Annual Review 2013/14; and Office of Fair Trading, Payday Lending Compliance Review. Final Report, March 2013, p. 26.
“ There is a significant mismatch between what debt charities say they are seeing, and the economic period we have just been through, and what we at the ombudsman are seeing on our front line. We are not seeing the volumes of payday loan complaints we would expect, given the implied size of the problem.”
Juliana Francis, senior ombudsman
Page 10 payday lending: pieces of the picture figure 2: payday loan enquiries by week, January 2009 to March 2014 2
Despite the number of complaints, giving general the consumers who brought complaints having more than advice and guidance to complaints to us doubled over the last two consumers on what to do if The consumers who brought a years, we are not convinced they have a complaint about complaint about payday loans to that our payday loan caseload a financial product or service. us in the last financial year were necessarily reflects the actual In total, we handled over two considerably more likely to be scale of consumer detriment million initial enquiries and drawn from younger age groups in this area. We get a sense complaints last year.12 than those complaining about of this from the calls we receive The number of weekly enquiries other financial products. from consumers that don’t to the ombudsman about payday necessarily crystallise into formal As figure 3 shows, there was loans has been growing steadily complaints. The ombudsman’s a particular spike in the 25-35 in recent years, as figure 2 customer contact division age bracket when compared shows. In the financial year (CCD) is our initial contact point to other types of financial 2013/14, we received 5,277 for consumers. The frontline complaint, including complaints enquiries from consumers advisers on our helpline deal about other consumer credit about payday lending. with all initial enquiries and products such as overdrafts and credit cards. figure 3: age profile of consumers bringing complaints to the ombudsman service, financial year 2013/14 35%
30%
25%
20%
15%
10%
5%
0% 18-24 25-34 35-44 45-54 55-64 65+ Unknown
Payday loans Overdrafts and loans Credit cards All products
source: Financial Ombudsman Service.
Financial Ombudsman Service insight report Page 11 This bias towards younger 2 figure 4: proportion of consumers aged below 35, and above 55, in 2013/14 consumers is not a surprising – payday loan complaints compared to other complaint categories finding in the context of the 50% payday lending market research 47% undertaken by the former 40% Competition Commission 34% 33% (now the Competition and 30% 30% Markets Authority), which showed that payday loan 20% 20% customers are typically younger 15% than the UK population as 12% 10% 8% a whole.13 The scale of the contrast in age profile of 0% consumers complaining about payday loans overdrafts credit card all complaint payday loans compared to other and loans accounts categories Under 35 Over 55 financial products is underlined source: Financial Ombudsman Service. Chart excludes complaints where the consumer’s in figure 4 , which compares age was unknown. the respective proportions of consumers aged below 35 This pattern is echoed in our wider payday market (16%) and above 55 across selected own distribution data. Figure 6 or UK population distribution product categories. overlays the geographical region (13%). We also saw a slight While we found that the age of consumers complaining overrepresentation in profile of consumers bringing to the ombudsman service complaints from Yorkshire and complaints to the ombudsman about payday loans with the Humberside (9%) compared service about payday lending Competition Commission’s to the market data (6%). was markedly different to market data and the UK’s The reverse picture applied complaints about other types population distribution. in the South East (11% against of product, the geographical It shows that consumers in 15%), the East of England distribution of consumers was London accounted for a higher (8% against 11%), and the very similar. Figure 5 shows proportion of ombudsman West Midlands (7% against 10%). the regions accounting for the complaints (18%) than the highest proportions of payday complaints were London (18%), the South East (11%) and the figure 5: regional distribution of consumers bringing complaints to the ombudsman service, financial year 2013/14 North West (11%). 20% The former Competition Commission’s research into the payday lending market found 15% that the regional distribution of payday lending customers 10% broadly reflected the distribution of the UK population.14 It found that payday lending 5% customers were slightly more concentrated in London relative
0% to the population, but that the Wales East of Ireland
differences were small. London Yorks & & Yorks Humber England Scotland Northern North East South East North West South West East Midlands East West Midlands West
payday loans overdrafts and loans credit cards all products
source: Financial Ombudsman Service.
Page 12 payday lending: pieces of the picture the businesses consumers figure 6: Regional distribution of payday loan customers compared 2 complained about 20% The businesses accounting for the largest number of complaints 15% about payday lending are shown in figure 7 . For the purposes of our statistical reporting, 10% complaints to the ombudsman service are categorised 5% according to group name, which will often be less recognisable than the businesses’ various 0% trading names shown in table 1 . Wales East of Ireland London For example, WDFC UK Limited, & Yorks Humber England Scotland Northern North East South East North West against which we received 237 South West East Midlands East new complaints in 2013/14, Midlands West is better known by its trading ombudsman payday loan complaints, 2013/14 name Wonga.com.15 regional distribution of PDL customers regional distribution of UK population
sources: Financial Ombudsman Service; and Competition Commission/TNS BMRB, Research into the payday lending market. Report, January 2014.
figure 7: converted cases by business, 1 April 2013 to 31 March 2014 WDFC UK Limited 237 Casheuronet UK LLC 50 Cfo Lending Limited 47 Express Finance (Bromley) Limited 47 Microcredit Limited 46 MEM Consumer Finance Limited 43 Instant Cash Loans Limited 32 Lending Stream Limited 28 Web Loan Processing Limited 20 Ariste Holding Limited 19 PDL Finance Limited 18 Motormile Finance UK Limited 15 other 192 source: Financial Ombudsman Service.
table 1: business groups and their trading names
business group name example business trading names include… WDFC UK Limited Wonga.com Casheuronet UK LLC Quick Quid; Pounds to Pocket; Web Cash Loans Cfo Lending Limited Payday First; Payday Advanced; Cfoloans.com Express Finance (Bromley) Limited Payday Express; Wage Advance; Fast Forward Loans Microcredit Limited Minicashloans.Co.Uk; MiniCredit.co.uk MEM Consumer Finance Limited Payday UK; Payday Now; The Payday Store Instant Cash Loans Limited Money Shop; Cash Centres Lending Stream Limited Payday Loan Store; Smartphone Loans; Check2Cash Web Loan Processing Limited Cashkingdom; Fastloanforyou; Toothfairy Finance Ariste Holding Limited Cash Genie; Go Cash PDL Finance Limited Mr Lender
source: Financial Ombudsman Service.
Financial Ombudsman Service insight report Page 13 the complaints we resolved 2 table 2: proportion of consumers’ complaints upheld by the Overall, the ombudsman ombudsman service in 2013/14, by business group service resolved 660 consumer number of number of proportion of complaints about payday business (group) resolved complaints complaints loans in the last financial complaints upheld upheld year, upholding 418 (63%). WDFC UK Limited 157 93 59% The service works hard to ensure that, wherever possible, Microcredit Limited 53 41 77% the delays caused by the high Express Finance 48 29 60% volume of Payment Protection (Bromley) Limited Insurance (PPI) cases we receive Casheuronet UK LLC 37 26 70% do not adversely affect our Cfo Lending Limited 35 27 77% handling of cases involving Instant Cash Loans 33 15 45% other financial products. In the Limited last financial year we resolved 51% of payday loan complaints MEM Consumer Finance 29 15 52% within three months and 80% Limited within six months.16 We are Lending Stream Limited 25 20 80%
also currently piloting new source: Financial Ombudsman Service. approaches to handling the Table includes businesses with at least 20 resolved complaints. enquiries consumers bring us about payday loans, to ensure We record the outcome of a As table 2 illustrates, uphold that we provide help as quickly complaint as “not upheld” in rates can vary considerably as possible. cases where: by business. For example, the The ombudsman service records • The financial business had ombudsman service upheld the outcome of a consumer’s done nothing wrong; or 80% of payday loan complaints against Lending Stream Limited complaint as “upheld” where: The financial business had • in 2013/14, 59% of complaints The financial business told done something wrong, • against WDFC UK Limited and the consumer in its final but had already offered the 45% of complaints against response that it had done consumer appropriate redress Instant Cash Loans Limited. nothing wrong but after the (before the complaint was complaint was referred to us, referred to us). we decided (or the business belatedly accepted) that it It is worth noting that just had done something wrong because we don’t uphold a after all; or complaint on its merits does not mean that the consumer • The financial business’s might not feel upset and let final response offered down by the way the business the consumer inadequate has treated them. Similarly, compensation but after the the fact that a consumer hasn’t complaint was referred to us, found the perfect words to we required the business express their complaint does (or it belatedly agreed) not automatically mean that a to increase its offer to an case has no merit. Individual appropriate level. uphold rates can be affected by a number of factors but generally a high uphold rate is cause for concern.
Page 14 payday lending: pieces of the picture chapter 3 a closer look: analysing a sample of the complaints received in 2013/14
Financial Ombudsman Service insight report Page 15 3 a closer look: analysing a sample of the complaints received in 2013/14
To dig deeper into the reasons underpinning consumers’ complaints about payday lending, we analysed a sample of some of the complaints we handled in the 2013/14 financial year. This chapter gives more detail about the consumers, lenders and loans represented in the sample of complaints we reviewed.
snapshot • The profile of the consumers represented in our sample of 353 complaints (age, gender, geographical region) closely matched the overall profile of those complaining to the ombudsman about payday loans in 2013/14. • In almost one in eight cases (13%), consumers in our sample had brought their complaint to the ombudsman with help from a relative, friend or carer. We did not see evidence of significant activity by claims management companies (CMCs). • Over a third of the consumers in our sample had brought a previous complaint to the ombudsman, and we also saw evidence that many had taken out previous payday loans. • The sample included complaints against 46 different businesses, with WDFC UK Ltd (Wonga) accounting for the largest proportion of reviewed cases (31%). • In the majority of complaints reviewed, consumers had initially borrowed £500 or less, although some had borrowed in excess of £1,000. In over half of the sampled cases, loans were still ongoing at the point of the consumer’s complaint to the ombudsman.
methodology Our selected sample was a sample of 353 individual also consistent with the cases between 1 April 2013 Payday loans are short-term, FCA’s definition of high-cost and the start of our review, unsecured credit products, short-term credit (HCSTC).18 which began on 21 February generally taken out for 12 2014. We used management We did not look at other short- months or less, and where the information data collated term high-cost credit products amount borrowed is usually from complaints cases to look such as logbook loans (secured less than £1,000. In selecting at demographic information against a vehicle) and short, our sample of payday loan about the consumers. fixed-term instalment loans, complaints to focus on in more We then reviewed the 353 nor did we include debt detail, we were guided by the individual files to glean more collection complaints that CMA’s working definition: information about what had gone related to payday loans, wrong and why the consumers “Small-sum cash loans as these complaints were had referred their complaints to marketed on a short-term levelled at the company the ombudsman service. basis, not secured against collecting the debt rather than collateral, including (but not the lender(s) from which the limited to) loans repayable consumer’s loan(s) originated. on the customer’s next payday or at the end of the month We looked at all payday and specifically excluding complaints that had both
home credit loan agreements, opened and closed since the credit cards, credit unions start of the last financial year and overdrafts.”17 (April 2013). This generated
Page 16 payday lending: pieces of the picture Areas of focus in our analysis figure 8: regional distribution of consumers in the sampled payday loan complaints 3 included identifying the main 20% and subsidiary reasons for consumers’ complaints; the size of the loans complained 15% about, and their date of issue; whether the loans had been 10% topped up or rolled over; and whether or not the consumers’ complaints 5% had been upheld. We also reviewed the complaint files for 0% evidence about the consumers’
circumstances which may Wales East of Ireland London Yorks & & Yorks Humber England Scotland have had a bearing on their Northern North East South East North West South West
complaint, for example obvious Midlands East West Midlands West evidence of financial hardship, unemployment, or serious sample of payday loan complaints analysed total payday loan complaints to the ombudsman service in 2013/14 illness. We also looked for source: Financial Ombudsman Service. evidence on how businesses had handled the complaints, particularly with respect to the consumers vulnerable consumers. “ There are a number represented in of reasons why Following the completion our sample consumers might of the file review, a series of use a representative. follow-up interviews were age, gender and region They may lack the conducted with adjudicators confidence to deal and ombudsmen working The profile of the consumers with their problem, in the ombudsman service’s represented in our sample of 353 consumer credit division. payday loan complaints was have issues such as This was designed both to consistent with the overall profile an illness to contend gather further qualitative of those bringing complaints with, or be in denial insight into the payday loan to the ombudsman service about their debt complaints we receive, about payday loans in the position. Often we see and to discuss the themes 2013/14 financial year. 62% of younger people whose arising from the review. the consumers in the sample parents complain on were men (compared to 60% their behalf.” overall) and 38% women (40%). Mark Hollands, ombudsman Consumers aged between 25 and 34 comprised the largest group within the sample and in the overall complaint figures (both 32%). And the regional distribution was almost identical, as figure 8 illustrates.19
Financial Ombudsman Service insight report Page 17 consumers in the payday lending 3 table 3: did the consumer bring the complaint themselves market. Responding to this or were they represented? finding, the ombudsman has consumers brought complaint themselves 84% (296) launched a campaign to increase consumer was represented by family/friend/carer 13% (46) awareness of the help we can consumer was represented by a 1% (3) provide and to urge consumers claims-management company struggling with any form of debt 21 other representation 2% (8) to seek free and impartial help.
base: 353 complaints. previous payday loans
representation previous complaints In our review we looked for evidence of whether consumers As shown in table 3 , in the Interestingly, just over a bringing complaints to us had vast majority of cases we third (36%) of the consumers previously taken out another reviewed (84%), consumers had represented in the sample had payday loan. While in two- brought their complaint to the previously complained to the thirds of cases (65%) it was ombudsman service themselves. ombudsman service, with 28% not possible to determine on However, in 13% of the sampled of these consumers having prior the basis of the information complaints, consumers were complaints relating to payday available in the ombudsman represented by a relative, lending, as shown in table 4 . case files, in a third (34%) it was friend or carer. Evidence of clear that the loan at the heart representation by claims- of the complaint was not the management companies (CMCs) table 4: at the point of the complaint, had the consumer consumer’s first.22 This is also was negligible, featuring in just previously complained to the consistent with what we heard 1% of the sample.20 Financial Ombudsman Service? first-hand from adjudicators and In the follow-up interviews ombudsmen, who told us that yes (116) we undertook as part of our 36% consumers bringing complaints research, adjudicators and no 64% (207) about payday lending frequently ombudsmen told us that a base: 323. The 353 complaints in the have multiple payday loans at variety of reasons can explain sample were brought by 323 individual any one time, or have taken out consumers. 21 consumers had brought why a consumer might be multiple complaints. For the purposes a number of sequential payday represented by another of this table, the individual consumers loans. Consumers in financial represented in the sample are counted person rather than bring just once – at the occasion of their first hardship were also much more the complaint themselves. complaint about a payday loan to the likely to have had previous ombudsman service. The personal circumstances of loans. Some of the consumers in some consumers may be such our sample had had 10 or more that they don’t feel able to cope The proportion of our sample previous payday loans from the with the stress of pursuing a with previous complaints to same lender. complaint. Adjudicators said the ombudsman is higher that when family members than we might have expected. bring a complaint on someone’s The ombudsman service already behalf it can be because they undertakes a significant amount recently found out about the of outreach work to boost payday loans and are trying to awareness of what we do and help. This was particularly the how we can help, including case with representation by around payday lending. parents, who sometimes also But the fact that more than repay the balance owed on one-in-three of our sampled behalf of their child. consumers had previously complained to us might suggest a lack of awareness about the ombudsman service among
Page 18 payday lending: pieces of the picture the businesses represented the loans at the centre of 3 in our sample the sampled complaints Our sample of 353 complaints comprised complaints against value of the loans in the sample 46 different businesses. The lenders represented are In 68% of the cases we listed in table 5 below. reviewed, excluding those The distribution broadly reflects featuring an allegation of that seen in our overall payday fraud, consumers had initially lending complaint figures, borrowed £500 or less with WDFC UK Limited accounting (see figure 9 ) . This excludes for the largest number of cases any subsequent charges, in our sample (110), reflecting fees or interest that may the size of their market share. have been applied. A greater proportion of our sample featured high value table 5: the businesses represented in our sample loans than was evident in the number of proportion of research conducted as part lender cases reviewed total reviewed of the former Competition WDFC UK Ltd/Wonga 110 31% Commission’s payday lending market investigation23, Casheuronet UK 26 7% as shown in figure 10 (overleaf). Express Finance 25 7% Excluding ‘unknown’ values Instant Cash Loans 21 6% from our sample of complaints, Microcredit 21 6% together with complaints CFO Lending 17 5% incorporating allegations of Lending Stream 16 5% fraud, 23% of cases featured initial loans of £500 or more. MEM Consumer Finance 16 5% This compares to just 10% of Web Loan Processing 10 3% loans studied by the Competition Ariste Holding 9 3% Commission. While we are not Think Finance (UK) 8 2% able to draw a causal link, it is PDL Finance 7 2% clearly possible that the higher Active Securities 6 2% borrowing by the consumers represented in our sample was Wage Day Advance 5 1% a contributory factor in their Cash on Go 4 1% bringing complaints to the Uncle Buck 4 1% ombudsman. other 48 14% base: 353 complaints.
“ It is noticeable that figure 9: amount of money consumers had initially borrowed a large number of £1-100 12% consumers who bring £101-200 18% complaints have had £201-300 15% more than one payday £301-400 18% loan – it is very rare £401-500 5% £501-750 10% that we see complaints £751-1,000 6% about a consumer’s £1,000+ 4% first loan.” Unknown 12%
Robert, adjudicator base: 278 complaints, omitting cases incorporating suspicions or allegations of fraud.
Financial Ombudsman Service insight report Page 19 3 figure 10: comparing the size of loans 35%
30%
25%
20%
15%
10%
5%
0% under £100 – £200 – £300 – £400 – £500 or £100 £199 £299 £399 £499 more
ombudsman sample Competition Commission research
source: Financial Ombudsman Service sample of complaints and Competition Commission, Research into the payday lending market. Report, January 2014, p. 37. To aid comparison The high proportion of ongoing between the two data sources, complaints incorporating allegations of fraud, and those where loans is likely to be due in part the size of the consumer’s initial loan was unknown, have been omitted from the sample of ombudsman complaints. to the number of consumers in our sample who were when the loans were taken out how long the payday loans experiencing financial had been running hardship.24 The distribution The date at which a consumer will also reflect the fact that brought a complaint to the Disregarding those cases by the time cases reach the ombudsman service is not featuring allegations of fraud, ombudsman service, something necessarily a good guide as to a noticeable feature of the has gone wrong which the when the loan at the centre of sample of cases reviewed was business has not been able the complaint was originally the length of time consumers’ to resolve to the consumer’s taken out. Of the cases loans had been running. satisfaction. It is perhaps no reviewed, 1% concerned loans In over half of the non-fraud surprise, then, that our snapshot taken out in 2014, 28% loans cases analysed (57%), of cases features very few taken out in 2013, and 29% consumers’ loans were instances of loans concluding loans from 2012. But just over ongoing at the point of in a short period of time. a fifth of sample cases, 22%, complaint to the ombudsman Indeed, in just 6% of the concerned loans taken out in service. In a further 17% of non-fraud cases we looked 2011 or earlier. In 68 cases cases, loans had lasted in at had loans lasted for a (19% of the sample), it was not excess of 76 days. See table 6 . month or less.25 possible to tell from the case file when the loan was taken out.
table 6: length of loan that was the subject of the consumer’s complaint
“ While the intention loan ongoing at time of complaint 57% (158) is to borrow a small 1-10 days 1% (4) amount over a short 11-20 days (5) term, often we see 2% that this does not 21-31 days 3% (7) reflect reality – 32-40 days 1% (4) particularly for 41-60 days 4% (12) those experiencing 61-75 days 1% (4) financial hardship.” 76 days + 17% (48)
Amanpreet, adjudicator Unknown 13% (36) base: 278 complaints, omitting cases incorporating suspicions or allegations of fraud.
Page 20 payday lending: pieces of the picture chapter 4
why consumers had brought complaints about payday loans
Financial Ombudsman Service insight report Page 21 4 why consumers had brought complaints about payday loans
One of the central goals of the research was to develop our understanding of why consumers complain to the ombudsman service about payday loans and what that might tell us about common patterns in what is going wrong. This chapter sets out our findings on the reasons driving consumers’ complaints to the ombudsman in the sample of cases analysed.
snapshot • Payday lending complaints were often found to be multi-faceted rather than single-issue, featuring a combination of reasons for complaint. • There was no single, dominant reason for consumers’ dissatisfaction. Instead, the case files analysed featured a broad spectrum of issues. • The review looked at the main feature of consumers’ complaints and also subsidiary features of complaints, where possible to identify. • The most frequently occurring main features of complaints were: allegations of fraud; poor administration; the unauthorised/unexpected taking of funds; and lenders ignoring debt repayment plans. • Taking the main and subsidiary features of complaints together, the leading issues were found to be: damage to credit records; poor customer service; and poor administration.
figure 11: main reason for main reason for Instead of one leading theme, consumers’ complaints about complaints five issues were particularly their payday loan visible as main features of For each complaint reviewed, the complaints, cumulatively review team aimed to identify accounting for 68% of the both the main reason for the sample. These were: consumer’s complaint and also • allegations of fraud any subsidiary reasons that were poor administration apparent from the case file. The • results present a surprisingly • the unauthorised or balanced picture. No single unexpected taking of funds dominant reason for consumers’ • lenders ignoring or not complaints emerged among the accepting a repayment plan spread of main issues identified, allegation of fraud 16% damage to the consumer’s as figure 11 illustrates. • poor administration 14% credit record unexpected taking of funds 13% repayment plan not accepted 13% Beneath these leading issues damage to credit record 12% “There is no single aggressive debt chasing 6% lay a further eight factors, unaffordability 5% stand-out reason including complaints focused high interest rates 4% for complaint in the misleading information 3% on aggressive debt-chasing, poor service 3% payday loan cases we irresponsible lending, high charges 3% see. Many are linked high costs, poor customer rollovers 1% other credit application rejected 1% to financial hardship service and the negative other 4% and poor business impact of payday loans on unknown 1% practice.” other credit applications. base: 353 complaints, including cases incorporating suspicions or allegations Rupy, adjudicator of fraud.
Page 22 payday lending: pieces of the picture Again, these reasons for table 7: what was the main feature of the consumer’s complaint 4 complaint were relatively about the payday loan they had taken out? evenly distributed across the remainder of the sample, allegation of fraud 16% (57) as table 7 shows. poor administration (eg loan paid into wrong 14% (49) account, not registering payment) all reasons for complaint unauthorised/unexpected taking of funds 13% (47) lender ignored/did not accept repayment plan 13% (45) When we take all observable damage to credit record 12% (42) factors of a complaint into account, instead of focusing lender aggressively chasing for debt 6% (22) on the principal discernible unaffordability (at the point loan was taken out, 5% (19) reason, a subtly different picture ie irresponsible lending) emerges. Adding together high interest rates 4% (15) all appearances of an issue misleading information (including mis-sale) 3% (11) across the sampled complaints, poor customer service 3% (11) damage to credit records and (eg failure to return calls, rudeness) poor customer service rise to the surface as the most commonly high charges 3% (10) observed features of complaints. rollovers 1% (5) See table 8 . application for other credit rejected 1% (3) (eg mortgage, overdraft) Comparing the results of the ‘main’ and ‘all’ features of other 4% (14) complaint tables, consumers’ unknown 1% (3) reasons for complaining about base: 353 complaints, including cases incorporating suspicions or allegations of fraud. a payday loan might be divided into three loose groups. It is clear that some issues that table 8: all features of consumers’ complaints about the featured prominently as main payday loan they had taken out reasons for complaint remained significant issues when all damage to credit record 24% (85) features of complaints were poor customer service 21% (73) factored in. We might term (eg failure to return calls, rudeness) these issues as being of poor administration (eg loan paid into wrong account, 20% (69) stable and high prominence not registering payment) across our sample of cases. unauthorised/unexpected taking of funds 19% (68) Examples include consumer lender ignored/did not accept repayment plan (65) unhappiness with poor 18% administration and the lender aggressively chasing for debt 18% (64) unexpected or unauthorised allegation of fraud 16% (58) taking of funds from their high charges 16% (56) account.26 high interest rates 12% (44) “ The lack of a central unaffordability (at the point loan was taken out, 7% (26) ie irresponsible lending) complaint issue is likely due to the fact misleading information (including mis-sale) 5% (18) that, if one thing went rollovers 5% (17) wrong with the loan, application for other credit rejected 3% (10) it’s likely another (eg mortgage, overdraft) five connected things other 12% (43)
happened before.” base: 353 complaints, including cases incorporating suspicions or allegations of fraud. Robert, adjudicator Totals include all discernible features of complaints, including the main feature.
Financial Ombudsman Service insight report Page 23 4 Stable • poor administration • unauthorised/unexpected taking of funds high prominence • ignoring/not accepting debt repayment plan • [fraud] Increasing • poor customer service • high charges prominence • damage to credit record • lender aggressively chasing for debt • high interest rates Low • rollovers • application for other credit rejected prominence • misleading information • unaffordability
Some issues which were not multi-faceted complaints Those handling payday lending especially prominent in the list cases remarked on the fact that, of main reasons for complaint The majority of complaints we while it is difficult to define a remained less significant reviewed in the sample were ‘typical’ payday complaint – issues when all components of found to be multi-faceted: they owing to consumers’ varied complaints are taken together. tended to comprise a variety reasons for borrowing and We might consider these of interwoven factors. Two- personal circumstances issues as being of relatively thirds (64%) of the sampled – many of the same issues low prominence across the cases featured more than one nevertheless arose time and sample, with examples including strand to the complaint, and in again. For instance, a consumer rollovers and the rejection of a quarter (26%) of cases there might be unhappy that their other credit applications as were three or more elements. loan repayment was not a result of having taken out a Omitting complaints involving processed by a lender on time, payday loan. an allegation or suspicion of subsequently leading to a late fraud, which tended to be single- payment marker. The backdrop Most interestingly, some issue cases, 71% of the sample to many such cases can be issues become considerably featured multiple aspects to the – in the consumer’s eyes – more conspicuous when complaint. poor business practice and all discernible features of customer service, an issue we complaints are taken together, This picture of multi-dimensional return to in a later section. and clearly form the backdrop complaints perhaps helps to to a much higher proportion of explain the fact that we found “ Complaints are complaints without necessarily no single issue dominating being the initial trigger cause. consumers’ reasons for bringing multifaceted as the We might term features in this a complaint to the ombudsman issues are linked. category as being of increasing service. It is a picture that Credit file issues arise prominence the more closely also emerged strongly in the from pretty much every we examine each case. The complementary qualitative case we see. If a loan category includes some issues interviews undertaken among was unaffordable, that might have been expected ombudsmen and adjudicators then the consumer to feature more strikingly as working in the service’s won’t appreciate principal drivers of consumers’ specialist payday lending team. the payments being complaints about payday loans, taken through a CPA. such as high interest rates and Financial hardship is high charges. also often entwined.”
Mark Hollands, ombudsman
Page 24 payday lending: pieces of the picture chapter 5
complaints about fraud
Financial Ombudsman Service insight report Page 25 5 complaints about fraud
It is widely recognised that fraud presents a major challenge for the payday loan industry. The Office of Fair Trading, the former sector regulator, observed last year that “it is difficult to quantify how much fraud the sector is subject to, but the growing incidence of complaints is a matter of significant concern to us.”27 Complaints about a loan the consumer said they had not taken out featured strongly within the payday complaints we reviewed – it was the most frequently-occurring main reason for complaint in our sample. This chapter looks at the content of some of those complaints and how they were handled by the business.
snapshot • Complaints from consumers that they had not taken out a disputed loan were highly prominent within the research sample, with one in six cases featuring an allegation of fraud. • Different types of fraud were seen in complaints, from alleged identity theft and phone-based scams to fraud perpetrated by someone known to the consumer. • Younger consumers in the sampled complaints were more likely to complain about fraud than older consumers.
The UK’s Fraud Prevention The OFT also raised concerns account; or late payment Service, CIFAS, recorded a 55% last year about the ability of markers might have been put annual increase in fraud on loan loans to be paid into a bank on the consumer’s credit file. accounts in 2013, and pointed account held in a different The uphold rate on fraud cases to the “rapid emergence of name to that of the applicant.29 within the sample was 61%, payday lending” as one of the in line with the overall uphold rate. Where an allegation is made main drivers: that a loan was not taken out by Looking more closely at the “... payday lenders have quickly the consumer, the ombudsman complaints in our sample, we become known as a speedy and service uses evidence to found that younger consumers convenient way to obtain money determine, on the balance of were more likely to complain with relative ease. The very probabilities, whether or not the that they hadn’t taken out a convenience that is an attractive consumer took out the loan, disputed loan. As illustrated in selling point has, of course, and will look at a number of figure 12 , alleged fraud was proved extremely tempting to factors when considering these the main reason for complaint of the fraudster …” 28 types of complaint. 39% of those in the 18 to 24 age group, compared to 15% While identity fraud occurs In some of the complaints among the over-55s. across the banking and we reviewed, the lender had consumer credit sector, it is already accepted the loan was suspected that the design of fraudulent but the consumer payday loans has made them a was complaining about particular target for fraudsters, a related issue. For example, “ Some consumers have as highlighted by CIFAS. the customer service and time a lack of awareness Ombudsmen interviewed taken in resolving the matter about the risks of in our research said that the may have been unacceptable; sharing personal speed of the application there may have been related details, for example process and lack of checks bank charges because the on social networking can seemingly allow fraudsters lender had taken funds out websites.” to slip through the net. of the complainant’s bank Amanpreet, adjudicator
Page 26 payday lending: pieces of the picture Often, the first the affected figure 12: fraud as the main reason for complaint, by age of consumer 5 consumer knew of the crime 40% was when money was debited from their bank account for the 30% loan repayment. The case study below gives an example from 20% our research. The case also highlights how closely linked fraud complaints can be with 10% those about damage to credit files (a theme we address in more detail in the following 0% 18 – 24 25 – 34 35 – 44 45 – 54 55+ chapter). Almost one in five of the cases in our sample where source: Financial Ombudsman Service sample of payday loan complaints. the main complaint was that the loan hadn’t been taken out by Adjudicators suggest that some Identity fraud, where a fraudster the consumer also featured younger people may be targeted had applied for a loan in the a related complaint about because they have shared key name of someone else, was damage to a credit file. personal information, such as common in the cases we their date of birth, on social reviewed. This seems to be a case study network websites. But all age problem in the market: a Citizens groups can be vulnerable: Advice survey of a sample of consumer learned of fraud adjudicators pointed to payday loan cases it dealt with after £200 was debited from examples of older people in the first six months of 2013 their account being susceptible to fraud found that one in five involved Four loans were applied for because they were less aware a consumer being chased for a in Miss D’s name. The first of potential scams. loan they had not taken out.30 Miss D knew of the fraud Our sample included cases was when the lender debited different types of fraud where fraudsters had seemingly more than £200 from her obtained personal information account. It then emerged A wide variety of different about the consumer (typically that the lender had tried to scenarios were seen within the their name, address and date of take further funds but the complaints, including identity birth) and stolen bank details debits were unsuccessful. theft, scams, fraud allegedly in order to apply for a loan. The loans were marked as perpetrated by somebody close Funds could then be paid into a ‘in default’ and were to the consumer, and occasions different account, unrelated to recorded on Miss D’s credit where the alleged fraud could the victim of the identity theft. record. After the consumer not be proven. Broadly speaking complained, the lender most businesses did take investigated and accepted allegations of fraud seriously “ Fraud is a big problem the loans had been taken out and would investigate a case. in the complaints we fraudulently. The business Below we review examples of the see against payday removed Miss D’s name different types of fraud we saw lenders. Payday loans from the loans and amended in the sample. are marketed as quick her credit file. But Miss D and easy but this felt she should have means detailed checks compensation for the can be sacrificed.” distress and inconvenience
Mark Hollands, ombudsman caused in getting the matter sorted out. The ombudsman service adjudicator agreed, upheld the complaint and awarded compensation.
Financial Ombudsman Service insight report Page 27 Loan scams, run by organised Sometimes a consumer said that 5 case study criminal fraudsters, also they had not taken out the loan featured in our complaints ex-partner took out numerous in question, but this could not sample. In some of the cases loans in victim’s name be proven. The case study below we reviewed, consumers had gives an illustrative example received calls purporting to The payday lender was from the sample of cases we be from well-known payday holding Mr C liable for loans reviewed. lenders offering to advance he said he had not applied for and knew nothing about. a loan. Agreeing, consumers case study had been asked to pay high Mr C said the loans had been flat-rate arrangement fees, paid into a joint account payday loan complaint but the promised loans without his permission and rejected as fraud could not be never materialised. In other subsequently withdrawn. adequately proven Debits from his account had complaints, consumers Mr A had previous payday suspected that the loan had failed and defaults were placed on his credit file. loans but complained to the been taken out by someone lender that one loan had close to them, such as a relative, The adjudicator upheld the case. The evidence suggested been taken out fraudulently friend or former partner, without in his name and put in to them knowing. One business Mr C had been defrauded by an ex-partner. The lender his account. The lender referred to instances such as investigated and reported these as ‘friendly fraud’. removed Mr C’s name from the account, refunded all that all the loans were applied The following case study for from the same computer, gives an example. payments made and removed defaults from his credit file. and that the address and mobile phone number used also matched that of Mr A. The ombudsman service adjudicator assessed that on the balance of probabilities, and giving appropriate weight to the documentary evidence available, it was fair to say Mr A had not given his personal details to anyone “ On the whole most businesses take fraud complaints else, and that it was unlikely seriously and investigate. They tend to acknowledge anyone else had access to the consumers’ concerns.” computer. The complaint was not upheld. Amanpreet, adjudicator
Page 28 payday lending: pieces of the picture chapter 6 complaints about damage to credit records
Financial Ombudsman Service insight report Page 29 6 complaints about damage to credit records
Many of the consumers in our sample of complaints were concerned about the long-reaching impact of information recorded about their payday loan on their credit file. But it emerged there was also a widespread lack of understanding about how personal credit files work in practice. This chapter reviews what we found.
snapshot • Complaints about damage to credit files featured in one in four cases (24%). This was the single most common issue of concern across the sample when all aspects of the complaint were considered. • 12% of cases cited damage to a credit file as the main reason for complaint – the fourth most frequent ‘main’ reason. • There was widespread misunderstanding about how credit reference agencies and personal credit files work, with many consumers asking for correct default notices to be ‘wiped’ from their file. • 18% of cases where the main complaint was an allegation of fraud also featured a complaint about damage to a credit file. • Some consumers complained they had been misled by the lender that a payday loan would improve their credit score.
complaints about credit file damage table 9: reasons why consumers had complained to the ombudsman service about payday loans Damage to a credit file was the fourth most frequent ‘main’ main feature all features reason for complaint in the of complaint of complaint payday loan cases we reviewed, Damage to credit record 12% (42) 24% (85) and overall featured in a quarter of all the sampled complaints base: 353 complaints, including cases incorporating suspicions or allegations of fraud. – the single most common issue of concern. See table 9 .
Complaints about damage to different reasons, one of the a credit file were frequently most frequently repeated themes interwoven with other issues was anger over the issue and in the cases we reviewed. recording of default notices. This is not surprising given the high proportion of consumers recording defaults in our sample who were in financial hardship: many of A lender will usually issue a these consumers will have default notice in writing once a had repayment problems and borrower has missed a number defaults recorded against them. of repayments – this is typically While consumers were prompted when the consumer is between to complain about damage to three and six months in arrears. their credit file for a number of
Page 30 payday lending: pieces of the picture The default is recorded on the A default will stay on the Other consumers felt the default 6 consumer’s personal credit consumer’s credit file for six should not have been issued file. This information is held by years. This can seriously impair at all. In the following example, three credit reference agencies their ability to get credit. typical of many we saw, (CRAs) – Callcredit, Equifax The majority of consumers in our the lender had failed to issue and Experian. Lenders are only sample were highly sensitive the correct notice of default. required to issue a default to this and understood the notice for debts regulated by the long-reaching implications of case study Consumer Credit Act. a default. One ombudsman noted that, “Even among those business fails to follow Lenders are obliged to report consumers with little financial guidance by not issuing all payment information to the understanding there is a fear default notice CRAs, including repayments of the wider reaching impact of made on time, late payments, Due to financial problems credit file information. For those missed payments and defaults. Mrs S fell behind with in financial difficulty it can be a Consumers can obtain their her loan repayments. The particular area of concern.” statutory credit file for £2 lender sold the debt on to from the CRAs. Prominent among those concerns a debt collections agency is the ability to obtain future who told her a default had In the case of a default the credit. This can be an acute been registered against her lender will report the default problem as payday borrowers name. She complained to the amount and date to the CRA. may struggle to find affordable lender stating that she had credit. Research commissioned not been informed before “ Many consumers by the Competition and Markets the default was issued. She asked the business to send a – not just payday Authority found that as many as copy of the default notice but loan borrowers – 39% of payday loan customers have no access to other types despite repeated requests don’t have a clear it did not respond. Only understanding of how of credit, such as overdrafts or credit cards,31 that three in ten following intervention by the credit records work. ombudsman service did the More needs to be have been turned down for credit in the past 12 months and that lender accept an error had done to better inform 52% have experienced debt been made and that it had not in fact issued a default people, particularly problems in the past five years.32 vulnerable groups and notice to the consumer. The those who have had Many of the complaints we complaint was upheld and problems with credit.” saw were about a default being the lender was required to issued too soon – without remove the default recorded Mark Hollands, ombudsman sufficient notice. In some with the credit reference cases a default notice had agencies. not been sent out before the default was registered with the CRA. According to guidance produced by the credit industry in collaboration with the Information Commissioner’s Office, lenders should notify consumers of their intention to register a default against them at least 28 days before doing so, to give consumers time to make an acceptable payment or reach an agreement with the lender on an arrangement.33
Financial Ombudsman Service insight report Page 31 In the complaints we reviewed, 6 understanding credit files case study it was common for the borrower Our review of cases revealed to ask the payday lender to consumer requests default be that many consumers showed ‘wipe’ or otherwise remove removed from credit file a lack of understanding about information from their credit how and why CRA information is record. In practice, businesses After purchasing his personal recorded. are obliged to record accurate credit file because of debt information with the CRAs, problems, Mr L became Research conducted by Which? including where payments aware there was a default in May 2014 supports the view are not made, are made late recorded for a previous loan. that credit files are a difficult or are insufficient. Accurate Mr L complained that this area for consumers to navigate. information of this kind cannot should be ‘wiped’ because Its survey found that consumers be removed as this is the data he felt this loan debt had felt CRA information to be businesses use when assessing been settled – with a reduced jargon-filled and confusing. a potential borrower for credit. figure agreed. He also Fewer than half of those It is also an important protection argued the lender had not participating in the Which? against fraud. given him sufficient notice research said that seeing their of the default. The credit file statutory credit report had given A number of lenders, including said the debt was ‘partially them a better understanding of Wonga, Quick Quid, Uncle Buck settled’ and the consumer felt their credit-worthiness.34 and Pounds to Pocket, have it should say ‘fully settled’ signed up to a real-time credit as the loan was paid off. “ Many consumers information service through The adjudicator did not don’t understand their Callcredit. The information, uphold the complaint, credit file. Even where which is updated daily, aims to considering that a default a business is doing give the most up-to-date picture notice had been sent within the right thing, the of a borrower’s credit history. the correct time frame and Previously data was shared that the consumer had been consumer often feels monthly, which doesn’t fit informed that the default the information should particularly well with the short- would stand even after not be recorded.” term nature of payday loans. the partial settlement. Rupy, adjudicator The adjudicator also The following case study explained that the partial demonstrates how consumers settlement was correct can be confused about data because the lender had held at the CRAs and the agreed to ‘write off’ part terminology used. of the debt and settle with a reduced figure.
Page 32 payday lending: pieces of the picture case study fraud and damage misleading information 6 to credit files consumer is unhappy that There has been increasing fraudulent loans caused Many complaints about media coverage about how other damage to credit file fraudulent payday loans also lenders view the presence of featured a related complaint payday loans on consumers’ Mr P was a victim of identity about the damage it had done credit records, and how fraud and a number of loans to the consumer’s credit record. this might affect the credit were taken out with the In 18% of cases where the applications of those consumers same lender in his name. main reason for the complaint who had previously taken out a Mr P was not aware of the was an allegation of fraud, there payday loan.35 crime until demands were was a subsidiary complaint Some of the cases we reviewed made for payment. The issue about credit file damage. featured complaints by was resolved with the lender The case study example to consumers who felt they had accepting fraud had taken the left is typical and shows been misled by lenders as to the place, but the ‘missed how fraud and damage to likely impact of payday loans payments’ had resulted in credit files can go hand-in-hand. on their credit records. A small marks on the consumer’s Although the consumer’s number of consumers said that credit file. Mr P asked the request for an increased they had deliberately taken out lender to instruct the CRAs compensation offer was payday loans to improve their to remove the incorrect data rejected by the adjudicator, credit rating, citing lenders’ against his name, but this the background to the case claims that repaying on time was not resolved for many reveals how the credit file issue would be beneficial, but had months. The lender agreed was pressing for the consumer. to pay the costs Mr P had subsequently experienced incurred in buying his credit being turned down for other file each month to check if lines of credit, such as credit the data had been removed. cards and overdrafts. It also paid compensation for Some consumers reported the trouble and upset caused. problems remortgaging. But Mr P did not feel this was In these complaints, enough, and escalated the while small in number, complaint to the ombudsman. consumers argued that the very The adjudicator did not uphold fact of having a payday loan had the complaint, considering damaged their credit score and that the lender’s offer was creditworthiness in the eyes reasonable. of other lenders, even though the loan had been repaid on time. Consumers felt that other lenders, such as high street banks, credit card and personal loan providers, viewed payday loans negatively – or saw their borrowers as high risk, even where there are no recorded late payments or defaults.36
Financial Ombudsman Service insight report Page 33 Potential lenders review a 6 “ We would need to see consumer’s credit history by looking at their credit file. that the wrong advice They then build an individual was given and the credit score for the consumer consumer would need based on their repayment to prove the payday history and borrowing patterns, loan affected their as well as other factors, ability to get credit which might include the – that is, it caused consumer’s employment status. them to suffer These scores are individual to financially. It is often each lender and are usually difficult to prove that commercially sensitive. it was the payday The provision of misleading product alone that information and the rejection of caused the rejection other credit applications were for other credit.”
not common features in the Juliana Francis, senior ombudsman sample of cases we reviewed, together accounting for 4% of the main reasons for complaint. Adjudicators and ombudsmen also reported that it is difficult to uphold complaints of this kind. This is because the consumer would need to show that the payday loan application itself had been responsible for the rejection for another line of credit, rather than any other factor or combination of factors. As one ombudsman commented: “Often a borrower has had other credit problems in the past so it is not possible to point to the payday loan and say this exclusively was the reason for the declined credit.”
Page 34 payday lending: pieces of the picture chapter 7 complaints about debt-chasing, poor administration and customer service
Financial Ombudsman Service insight report Page 35 7 complaints about debt-chasing, poor administration and customer service
Our review uncovered a range of inter-related complaints from consumers unhappy with the manner in which they had been chased for debt, the way lenders had administered loans, and the quality of lenders’ customer service. In this section we look in more detail at the key themes arising.
snapshot • The experience of those struggling to repay loans is of particular policy and regulatory interest, and our sample included numerous examples of consumers having problems agreeing a suitable repayment plan with their lender. • We also saw many instances of consumers complaining about what they felt to be aggressive debt-chasing by lenders. This could be particularly stressful for those with mental health illnesses. • Behind allegations of fraud, poor administration by lenders was the second most frequently observed main feature of the complaints we reviewed. • Complaints about poor administration covered a diverse variety of issues, including loans paid into the wrong account, the miscalculation or misapplication of fees and charges, and repayments not being received or registered. • While featuring less prominently as a main reason for complaint, poor customer service was a thread running through many of the cases we looked at, often exacerbating the effect of other issues.
what we found We also look at a further debt repayment significant theme of complaints: and collection Our review of complaints consumers who were unable to unearthed some issues you agree a debt repayment plan In advance of assuming might expect when looking at with their lender, or who were responsibility for the regulation a selection of payday lending unhappy at how they were being of consumer credit, the FCA cases, such as consumer chased to repay outstanding announced that one of its first concern about high interest amounts. actions would be to review how rates and charges. But we also payday lenders collected debt uncovered a high degree of and managed forbearance and consumer unhappiness about consumers in arrears.37 more ‘everyday’ business practices of payday lenders, with a failure to quickly correct table 10: reasons why consumers had complained a mistake often compounding to the ombudsman service about payday loans the effect of the original error. In the following sections we main feature all features look at the numerous different of complaint of complaint ways in which this found lender ignored/did not accept 13% (45) 18% (65) expression, from sloppy repayment plan administration (such as lenders lender aggressively chasing for debt 6% (22) 18% (64) paying loans into the wrong account) to poor customer service. base: 353 complaints, including cases incorporating suspicions or allegations of fraud.
Page 36 payday lending: pieces of the picture Explaining the priority attached The disagreement could be case study 7 to investigating these issues, over the application of further the FCA noted that one in three charges and fees, the amount lender fails to engage with payday loans were repaid late it would be reasonable for a a consumer trying to set up or not at all, equating to over 3 consumer in difficulty to repay, a repayment plan million loans a year.38 or an appropriate schedule for the repayment. In a number of Having taken out a loan, Consumers who were struggling the complaints we reviewed the Mr G subsequently ran into to repay the payday loans they lender and consumer agreed a financial difficulties. He had taken out were a particular repayment plan following the contacted the lender to say focus of our own review. involvement in the case of the he would be unable to make Within the sampled complaints ombudsman service. While this the scheduled payment. we saw considerable evidence facilitation can be a key part He requested a repayment of consumers encountering of our role, it would clearly be plan and asked that the problems agreeing a debt better for agreement about an lender freeze interest and repayment plan with a lender, appropriate repayment plan to charges. Mr G made repeated or expressing unhappiness be reached before it becomes attempts to contact the lender with what they felt to be necessary for a consumer but it did not respond. The insensitive debt collection to refer the issue to the lender eventually replied practices ( table 10 ). These ombudsman. approximately a month later, issues were often interlinked. suggesting a repayment plan We also saw many instances of that the customer did not feel The treatment of those having consumers complaining about was reasonable. Reviewing problems repaying is obviously the aggressive pursuit of debt the case, the ombudsman particularly important given the by lenders. These complaints service did not consider that financial insecurity of many in had some common threads, the lender had responded this position. Of the 45 cases particularly where lenders had positively or sympathetically in our sample where the main not accepted (or processed) a to Mr G’s financial difficulties. feature of the complaint was debt as having been repaid. In In settlement of the the lender not accepting or these cases consumers were complaint, the lender agreed honouring a repayment plan, all unhappy to receive letters to reduce the outstanding but one involved a vulnerable or calls from debt collection balance, set up a fair consumer, that is to say a companies relating to loans repayment plan and to make consumer who – on the evidence they believed they had paid off. a payment to the consumer in available in the case file – was Some consumers found some of recognition of the trouble and experiencing obvious financial, this contact threatening and felt upset caused by its handling medical or personal difficulties. harassed. The combination of of the complaint. As described elsewhere in this chasing letters and calls, added report (see chapter 9), and charges, the taking of further is well understood, payday payments, and the passing Some of the consumers in our loan debts can quickly spiral of debts to third parties, sample had linked complaints for those struggling to repay were at the heart of a number against debt collection due to the effect of cumulative of the cases we reviewed. companies. Although it is not interest charges and fees for Some were further aggravated possible to quantify the extent late payments. Our sample by consumer perceptions of of this possible connection in contained numerous instances poor administration or poor our overall caseload on the basis of consumers having difficulty customer service. of the sample of payday loan cases meeting a contractual repayment we reviewed, it was nevertheless but being unable to agree a a noticeable feature. suitable alternative repayment plan with their lender.
Financial Ombudsman Service insight report Page 37 Debt-chasing can be particularly As with our sample generally, 7 case study stressful for consumers with complaints about poor a consumer is chased by debt acute mental health illnesses, administration were frequently collector to repay loan he had and we saw some instances of intertwined with other issues, not taken out consumers receiving chasing such as poor customer service messages by text or email while and aggressive debt chasing Mr S received a letter from hospitalised. In one case a – both of which we look at in a lender advising him of an lender explained that the root subsequent sections. outstanding debt. Knowing cause of the poor timing of nothing about the loan, some messages encouraging a he assumed it had been consumer to repay was that the case study fraudulently taken out messages were automated, and lender chases consumer in his name. Unhappy at therefore unable to discriminate insensitively for debt being threatened with court between consumers in different action for a loan he had not circumstances. This was not Following a successful taken out, Mr S passed the accepted as a fair or reasonable application for a loan crime reference number explanation by the ombudsman, which she subsequently he had been given by the which felt that more care and had to roll over, Miss V was police to the debt collecting attention should be taken when admitted to medical care for company acting on the dealing with consumers in a mental health condition. lender’s behalf. Following vulnerable circumstances. A representative contacted the consumer’s complaint, the lender on the consumer’s the lender accepted that a behalf to explain the situation, mistake had been made and poor administration and asked that Miss V’s agreed to write off the debt. Behind allegations of fraud, account be put on hold to Some weeks later however, poor administration by lenders avoid interest and charges Mr S received a further letter – for example loans paid into being applied. The lender saying that the balance was the wrong account or payments said that it would require still outstanding and that not being registered – was evidence of the consumer’s the account had been passed the second most frequently situation, and that it would be to another debt collector. occurring main reason for happy to review the account The letter had been sent complaint we saw in the sample once the evidence had been in error due to the lender’s of cases reviewed. As shown in received. In the meantime, system not having been table 11 , poor administration however, the business sent updated. also featured strongly when collections messages directly all aspects of complaints were to Miss V’s mobile phone taken into account: a fifth of all to remind her that the loan was due. The representative “ Administration can be cases in the sample included an element of poor administration. argued that this had caused poor, for example with Miss V considerable distress payments not being at a difficult time. recorded and websites The ombudsman service giving inconsistent upheld the complaint. information. With business table 11: reasons why consumers had complained levels increasing, to the ombudsman service about payday loans administration main feature all features and complaints of complaint of complaint are often not dealt with proactively by poor administration 14% (49) 20% (69) (eg loan paid into wrong account, businesses.” not registering payment) Stephen Cooper, ombudsman base: 353 complaints, including cases incorporating suspicions or allegations of fraud.
Page 38 payday lending: pieces of the picture The case studies on this case study case study 7 page illustrate the sorts of administrative errors consumers discount incentive to take out lender fails to process loan complained about. But there a loan was not applied cancellation request, adding was a very diverse range, fees and charges from miscalculated interest to Mr M was offered a cashback Having applied for a payday the failure to respond to letters; deal on his loan as an loan, a consumer with a from the failure to cancel loan incentive. But having taken mental health condition applications within the relevant advantage of the offer, then asked for the loan time period to the registering the discount was not applied. to be cancelled within the of defaults with credit reference He repeatedly tried to get 14-day ‘cooling off’ period. agencies without notifying in touch with the lender by The lender failed to process the consumer. email, but received no reply. When he did eventually speak the cancellation in time and to the lender by telephone, the loan was issued. But the case study he arranged a call back. lender did not immediately consumer applies for a loan This also never happened. take back the loaned sum that is never paid, but is still Mr M was unhappy at the and, when it did later attempt chased for repayment errors that had been made, to recover the money, the service he had received, there were insufficient Mrs B applied for a loan and the charges incurred by funds in Mr J’s account. but the funds were never calling a chargeable business Fees and charges were added, paid into her bank account. rate telephone number to and the debt passed to a She informed the business try to resolve the issue. recovery firm. When Mr J of this, and was told it would The lender recognised the subsequently asked for the be investigated. The lender error, but part of the refund amount he needed to repay, then started to chase her was not paid. The consumer’s he was quoted different for repayment, saying she complaint was upheld by amounts on different had not made the necessary the ombudsman service. occasions by the lender. payments, and added interest The lender was then late The debt-chasing had a and charges. The lender paying the required redress significant negative then put a default notice to the consumer, although impact on Mr J’s condition. on Mrs B’s credit file and eventually the money was paid. The complaint was upheld instructed debt collectors. by the ombudsman service. The ombudsman upheld The lender was ordered to the complaint and made write off the debt, remove all an award in recognition traces of the loan from Mr J’s of the trouble and upset credit file and pay £200 in caused to Mrs B. compensation for the trouble and upset caused.
Financial Ombudsman Service insight report Page 39 7 poor customer service The case study opposite gives And consumers also complained just one example of a consumer about lenders being elusive While not featuring prominently not receiving the service or when consumers did want to as a principal cause for treatment they expected when get in touch to raise an issue, consumer complaints in dealing with a lender. But poor for example by failing to return our sample of cases, poor service is inevitably difficult to calls or emails within promised customer service was a strong disentangle from other elements timescales, or by generally background noise, as shown of a complaint, and is implicit being inaccessible or unwilling in table 12 . As with poor in many of the case studies we to engage about a complaint, administration, bad service include elsewhere in the report. as our case study illustrates. often served to compound Consumers frequently expressed consumers’ unhappiness about unhappiness at the way in which case study a different aspect of their lenders had communicated original complaint, accelerating with them as customers. consumer told that the frustration and delaying the This sometimes took the form lender was unable to handle resolution of their problem. of contact perceived to be complaints itself As one of our ombudsmen disproportionate, for example in Mr F complained to the commented, poor customer lenders’ pursuit of outstanding ombudsman service on service is a thread running debt. On other occasions behalf of a relative, through many of the payday consumers complained about who was no longer able to lending complaints we see, inappropriate contact, such as cope with the level of debt and businesses’ responses to when lenders telephoned them they had accumulated. consumers’ complaints can – at work when consumers Mr F had tried to communicate in the worst practice we see had specifically requested with the relevant lender to – simply morph into further otherwise, or lenders being inform them of his relative’s demands for payment. rude on the phone. situation and to manage it, but found the lender difficult to deal with. Mr F claimed he table 12: reasons why consumers had complained was told by the lender that to the ombudsman service about payday loans it was unable to deal with main feature all features customer complaints itself, of complaint of complaint that there was no customer service or complaints team poor customer service 3% (11) 21% (73) he could speak or write to, (eg failure to return calls, rudeness) and that he should instead base: 353 complaints, including cases incorporating suspicions or allegations of fraud. contact the ombudsman. Mr F found this odd and confusing, understanding that the ombudsman service “ We see many payday loan businesses that are focused should be a last resort. on low overheads and high turnover. It means customer He argued that “This company service can be neglected – it just doesn’t appear to be a needs to address their priority for many firms we see in this sector.” problems with customer service to those in difficulty.” Juliana Francis, senior ombudsman The complaint was upheld.
Page 40 payday lending: pieces of the picture chapter 8
complaints about continuous payment authorities
Financial Ombudsman Service insight report Page 41 8 complaints about continuous payment authorities
The FCA, which assumed responsibility for the regulation of payday lending in April this year, has scrutinised the way in which lenders collect repayments from borrowers via continuous payment authorities (CPAs). It found that some firms were using CPAs as a debt collection method, and has introduced tough new rules controlling their use. Complaints alleging that a CPA was used excessively or without warning were a common theme in our review, as this chapter details.
snapshot • The unexpected or unauthorised taking of funds (via a CPA) from an account by a payday lender was the third most common (main) reason for consumers in our sample to bring a payday loan complaint to the ombudsman. • Complaints about CPAs were repeated throughout the cases analysed even where they were not the main reason to complain. CPA misuse was cited as an issue, in total, in almost one in five complaints. • Repeated use of a CPA after a consumer had defaulted or was in hardship was a frequent cause of complaint.
A large number of consumers what were the case study complaints about? who brought payday loan complaints to the ombudsman lender refused to stop CPA CPA payments are set up using service were unhappy about how despite consumer’s financial a debit or credit card. The CPA CPAs had been used. As table 13 hardship gives the lender the authority shows, more than one in ten Following personal problems to take regular automated complaint cases (13%) cited Mr W was forced to reduce payments from the consumer, the unauthorised or unexpected his working hours which led without needing permission taking of funds as the main to difficulties meeting loan each time, with the money reason for the complaint. repayments. He offered a being collected from the card – And when subsidiary reasons reduced repayment plan to typically a debit card linked to a to the complaint were recorded, the lender and withdrew bank account. The day on which this rose to 19% – almost one consent to the CPA. the payment is taken can vary, in five.39 The lender claimed not to as can the amount. The following case study have received this notification demonstrates how the CPA and continued to debit funds can cause tension between from his account via the CPA consumer and lender. on numerous occasions, exacerbating his debt problems. The ombudsman table 13: reasons why consumers had complained service adjudicator upheld to the ombudsman service about payday loans the complaint. The business main feature all features was told to reduce the of complaint of complaint outstanding balance owed by removing the interest unauthorised/unexpected taking 13% (47) 19% (68) and charges incurred after of funds the consumer informed it base: 353 complaints, including cases incorporating suspicions or allegations of fraud. of his difficulties.
Page 42 payday lending: pieces of the picture In 2012, the four main trade New FCA rules limit the In its compliance review of 8 associations representing number of times lenders can the payday market, the Office payday lenders came together unsuccessfully use a CPA to of Fair Trading said CPAs to produce a voluntary code of two. The regulator has also had been the subject of conduct for their member firms banned the use of a CPA for part a ‘substantial number’ of – the Good Practice Customer payments – a CPA can only be consumer complaints, such Charter for payday and short- used if it pays off the loan in as the consumer not being term loans.40 The Charter full. Borrowers can re-set the aware that they had signed up outlines how the industry aims CPA if they choose to roll-over to a CPA or how it would work, to treat borrowers when using or refinance the loan. Firms are and lenders taking frequent CPAs. It states that firms will: now required to keep records part-payments over several to show the consumer has days or weeks often leaving “Always notify you by email, consented to further use the consumer facing financial text, letter or phone at least of a CPA. It will also not be difficulties.44 three days before attempting considered appropriate to use to recover payment using Analysis of 665 payday loan a CPA where a consumer is in continuous payment authority customers who contacted financial difficulty.41 Should we on the due date. This notice Citizens Advice for debt help see systemic breaches of these will ask you to contact us if between January and June new rules, we will alert the FCA. you are in financial difficulty 2013 showed that 32% had and cannot repay.” The regulator has made it complaints about a CPA, clear that businesses have an with one in six saying that But many of the complaints we obligation to cancel a CPA at the lender used a CPA to take reviewed related to the frequent the request of the customer. more than originally agreed.45 use of a CPA after the loan due The FCA has also stated that Separately, the FCA has also date, typically when the full should a payment go through by found evidence of payday amount of the repayment mistake following a cancellation lenders failing to communicate could not be recouped through by a customer, then the important information about the the CPA or the consumer had customer would be refunded function of CPAs and how they defaulted on the loan. immediately.42 differ from direct debits.46 One adjudicator said: “Firms Unlike direct debits, there are The complaints seen at the usually send a reminder a few no ‘money back’ safeguards ombudsman included cases days before the repayment due for consumers with a CPA. where a CPA had been applied date, but they don’t tend to give For example, under the ‘direct earlier than the borrower any further notification after debit guarantee’ customers can expected, so it came as a shock. this, for example for further get a full and immediate refund In some cases, the use of the CPA attempts – of which there from their bank for any payment CPA in this way had led to bank can be many.” Indeed, we taken in error. If payment dates overdraft charges or financial saw examples of businesses or the amount change with a hardship. In other cases, attempting to take payments direct debit, the consumer will consumers felt that too much using a CPA on consecutive days typically be notitified 10 days in money had been taken via the for an extended period of time. advance of the payment.43 CPA or that the CPA had been This continual dipping into the used too frequently. consumer’s account could often cause the borrower to incur bank charges, for example on an unauthorised overdraft. It could also leave the consumer without sufficient funds to pay for necessities such as rent and food.
Financial Ombudsman Service insight report Page 43 8 In our review of complaints we In some of the complaints The next case study gives saw some examples of a friend we reviewed, the adjudicator an example from our review or family member using their considered that the lender had sample of a lender showing debit card to make a one-off not used the CPA unreasonably good practice in demonstrating payment to help the borrower despite the consumer’s forbearance and proactively pay off some of their debt, only complaint. In these cases we trying to communicate with for the lender to then start using were satisfied that the consumer the consumer. a CPA on the card, as the next was aware of and accepted that case study illustrates. the lender was permitted to take case study payments from the registered use of CPA not unfair as case study card. That said, we would expect the lender to act reasonably borrower was evasive father used debit card to pay and sympathetically, continue Mr K made a complaint about off daughter’s debt and was to try to contact the consumer a number of payments he hit with CPA and, where appropriate, freeze claimed the lender took After his daughter got into interest and charges. without his permission. difficulties repaying her When Mr K missed the payday loan Mr P stepped in repayment on a one-month and offered to make a part “ Often the consumer loan the lender tried to get payment towards reducing is in difficulties and in contact by phone, email her outstanding balance. struggling to pay, and post but Mr K did not The payment was made over only for the lender respond. The phone number the phone using his debit to repeatedly dip he had given was incorrect. card. At the time he made it into their account. The consumer claimed he was clear this was to be a one-off The unexpected and unable to get in contact with payment and no permission relentless nature of the lender but the adjudicator was given for use of a CPA. CPA can make the considered that the lender However, in the following consumer’s situation had done the right thing and weeks the lender took various much worse.” that the terms of the loan sums of money by using a CPA and the CPA agreement were linked to Mr P’s bank card, Mark Hollands, ombudsman made ‘sufficiently clear’ at causing him to go into an the outset. The case was not unauthorised overdraft and upheld. Even so, the lender incur high penalty fees from showed forbearance and his bank. Mr P complained to wrote off a large part of the the payday lender and was consumer’s outstanding debt. refunded the money taken through the unauthorised CPA but it did not compensate him for the bank charges. For this reason the complaint was brought to the ombudsman. The adjudicator upheld the complaint and told the lender to pay £150 in compensation and to cover the bank charges.
Page 44 payday lending: pieces of the picture chapter 9 complaints about high costs and charges
Financial Ombudsman Service insight report Page 45 9 complaints about high costs and charges
The high cost of payday loans has been one of the biggest criticisms of the industry by politicians, consumer groups and debt charities. This chapter looks at the complaints the ombudsman received about interest rates and charges, why the complaints were brought, and who brought them.
snapshot • Although the cost of credit did not feature prominently as a primary reason for complaint, either one of high interest rates or high charges was cited as a contributory factor in many cases. • Consumers who were in financial hardship were more likely to complain about high interest rates and charges. • Complaints about charges tended to be about default and other penalty fees rather than up-front administrative, rollover or loan advance charges.
the high cost But this is only part of the Ombudsmen interviewed of borrowing picture. When complaints were during our research said that further analysed to look beyond while the cost of the loans can At the start of the research we the main reason for complaint be high, most consumers are anticipated to find that one of and take into account additional aware of these costs because the main reasons consumers had issues, in total 12% of cases typically they are clearly complained about a payday loan mentioned high interest rates presented by lenders at the would be its high cost. and 16% mentioned charges. outset. This is echoed by other research: a 2013 Citizens Advice Interestingly, few consumers Our findings in this respect survey of payday borrowers complained about upfront costs, were surprising. As shown in found that eight in ten were such as the fees associated with table 14 , high interest rates clear about the total repayment setting up a loan or the headline were cited as the main reason cost of the loan.47 for complaint in just 4% of the interest rate (annual percentage sampled cases we analysed. rate – known as APR). High charges were the main
reason for complaint in 3% table 14: reasons why consumers had complained of the sample. to the ombudsman service about payday loans
main feature all features of complaint of complaint high charges 3% (10) 16% (56) high interest rates 4% (15) 12% (44)
Page 46 payday lending: pieces of the picture Moreover, research conducted As many as a third of payday In the following case study 9 by the Personal Finance loans might be repaid late or drawn from our review of Research Centre at the not at all, meaning that many complaints, an ombudsman University of Bristol suggests consumers are incurring late ruled that the lender had not that only a minority of payday charges.49 And yet default fees treated the consumer ‘fairly or loan borrowers look at APRs. can come as a shock to the reasonably’ in its application of Instead, most look at the total consumer. Research by the a succession of high charges. cost of the loan – including fees former Competition Commission and charges. But it also found (now the CMA) found that case study borrowers were insensitive to “customers tend to become the price charged. When asked aware of rollover or penalty Unfair application of charges if they would have still taken the charges only when they ramps up consumer’s debt loan if it had cost more, 44% of incurred them.”50 online payday loan borrowers Mr H took a £100 loan but One explanation, according to said yes, rising to 56% of high got into financial difficulty a further CMA report, could be street payday loan customers.48 and was unable to repay. The that online providers do not lender levied an immediate Complaints about interest always present late payment or £25 default charge. Just days and charges in the sample we default fees on the same internet later a further default charge reviewed largely related to the page that shows other costs was issued. Over the course interest and charges applied and charges. It concluded: of three months numerous once a borrower missed a “This implies that customers debit attempt fees were also repayment (default charges) have to make an additional charged, totalling £400. Mr and the fees applied when a effort in order to find out H informed the lender of his CPA didn’t work due to information on these fees.”51 difficulties but it continued to insufficient funds in a apply charges and interest. As noted earlier, the FCA has borrower’s bank account It also refused to give Mr H a now published proposals to cap (debit attempt fees). breakdown of what charges it – from January 2015 – the total Complaints about excessive had applied. The ombudsman amount that high-cost short- interest rates were similarly ruled that the lender had term credit lenders can charge. more likely to come once a not helped the customer There are three elements to the borrower was in significant even when it knew of his FCA’s proposed approach. In difficulties and struggling difficulties. It had continued addition to a cap on total costs to repay – so their debt to apply interest and charges (100% of the amount borrowed, was escalating. and to pursue debt collection applying to all interest, fees and activity – dramatically charges), there will be a daily increasing the size of Mr H’s “ The application of limit on the interest and charges debt and causing him high charges and the that can be applied (0.8% of distress. The complaint was frequency of those the amount borrowed), upheld. Most of the charges charges can come as and a maximum limit of £15 and interest were refunded, a shock. When you’ve on default fees. 52 and Mr H was awarded £150 missed a payment you in compensation for trouble know you’re going to and upset. The lender was get hit, but you’re not also required to inform credit necessarily aware of reference agencies that the how hard.” debt was settled, reflecting
Stephen Cooper, ombudsman what the loan balance would have been had interest and charges been frozen.
Financial Ombudsman Service insight report Page 47 9 Looking at our sample of The case study below presents complaints, we found that one such example, where vulnerable consumers and a consumer’s original debt those in hardship were more increased tenfold due to the likely to complain about high application of a range of fees charges and interest.53 and charges. Almost a quarter (23%) of vulnerable consumers in our case study sampled cases complained about high charges and almost £100 initial loan grows to a fifth (19%) complained more than £1,000 due to about high interest rates. charges and interest This compares to 8% and 5% Miss O was in financial respectively among those difficulties and unable to consumers where factors of repay her loan on the due vulnerability were not evident date. Over a five-month in the case file.54 period, a combination One possible explanation for this of default charges, debit disparity is likely to be that the attempt fees, interest, charges relate to defaults and and a debt recovery fee unsuccessful debit attempts. acted to increase the debt The debt advice charity from £100 to £1,000. StepChange, which last year After intervention by Citizen’s recorded an 82% increase Advice, the lender agreed in consumers seeking its to a final settlement of help with payday loan debts, £450 via a repayment plan. commented earlier this year Miss O felt that this was still that: “StepChange continues to unfair. But the ombudsman see numerous cases in which service adjudicator was debts are excessively inflated unable to uphold her through the application of complaint as Miss O did interest and charges. In one case not respond to requests the charity helped a man whose for additional evidence £200 debt grew to £1,851 in and information to support her case. just three months”.55 We saw similar instances in our review of complaints where at the point at which a consumer hit repayment problems, the application of “ High APRs aren’t the foremost of consumers’ charges – sometimes levied frequently over a short period concerns. Their main worries are ‘will I get the money’ of time – significantly increased and ‘when will I get it’? If you don’t have a choice the consumer’s debt, further about how and where you borrow, you’re less likely impacting their ability to repay. to be complaining about the cost.” Dan, adjudicator
Page 48 payday lending: pieces of the picture chapter 10
the experience of vulnerable consumers
Financial Ombudsman Service insight report Page 49 10 the experience of vulnerable consumers
A large proportion of the consumers who brought payday loan complaints to the Financial Ombudsman Service could be considered ‘vulnerable’. Consumers are not obliged to tell the ombudsman service about their personal circumstances, and our research did not use a specific criteria or measure of vulnerability. But evidence of vulnerability was often visible within consumers’ case files. This chapter takes a closer look at their experience.
snapshot • More than half of all the reviewed complaints had at least one background factor which meant the consumer could be considered ‘vulnerable’. These included financial hardship, unemployment, disability, acute illness and mental health issues. • The most common reasons for complaint among vulnerable consumers differed from the remainder of the sample. The leading reason for complaint was lenders ignoring or not accepting debt repayment plans. • Businesses’ treatment of vulnerable consumers was mixed. But where bad practice did occur, it could cause a rapid escalation of the consumer’s debt problem. • Vulnerable consumers were more likely to have rolled over and topped up their loan. It was also more likely that their loan debt was outstanding at the point the consumer brought the complaint to the ombudsman service.
financial hardship consumer was in a ‘vulnerable’ As such, the proportion of situation, which we took to outstanding loans might be According to research incorporate financial hardship expected to be high. But as the undertaken by the former and a range of other possible comparison above suggests, it is Competition Commission, indicators, such as acute illness, also likely to be an indicator of more than a third of payday loan unemployment and addiction. loan repayment problems. borrowers are considered to be on a ‘low income’, with a net Chapter 3 outlined the household income of £18,000 or information we were able reasons for complaint 56 to glean on how long the less. More than half have had The features of the complaints payday loans taken out by the debt problems in the past five brought by vulnerable 57 consumers in our sample had years. And two-fifths (39%) are consumers also tended to been running. We found that reported to have no access to differ – sometimes strikingly 58 vulnerable consumers were alternative sources of credit. so – from those in the remainder much more likely than the rest of of the sample. In that context, it was not the sample to have an ongoing surprising to find financial loan at the point of complaint to As shown in table 15 , the most hardship featuring prominently the ombudsman (67% against common feature of complaints in our research: 42% of the 38%). Clearly, as a service we brought by vulnerable complaints we reviewed centred see cases where something has consumers were problems on consumers struggling with both gone wrong and a business agreeing a debt repayment their finances. In total, more has been unable to resolve the plan with a lender.59 than half of the sample – 52% issue to a consumer’s satisfaction. of the reviewed complaints – contained evidence that the
Page 50 payday lending: pieces of the picture In stark contrast, only one per Further mismatches can be seen 10 cent of the sample group who in the respective prominence did not fall in the vulnerable of complaints about high category complained about a charges (23% against 8%) lender failing to accept or and unaffordability respect a debt repayment plan. (14% against 1%).
table 15: why had consumers complained? vulnerable group remainder problem with debt repayment plan 34% (63) 1% (2) poor customer service 25% (46) 16% (27) aggressive chasing for debt 23% (43) 13% (21) high charges 23% (43) 8% (13) unexpected/unauthorised 23% (42) 15% (26) taking of funds damage to credit record 19% (36) 29% (49) high interest rates 19% (36) 5% (8) unaffordability 14% (25) 1% (1) poor administration 11% (20) 29% (49) rollovers 7% (13) 2% (4) allegation of fraud 4% (8) 30% (50) misleading information 3% (5) 8% (13) application for other credit rejected 2% (4) 4% (6) other 10% (18) 14% (25)
base: 353 complaints: 185 complaint cases with a background feature of vulnerability, 168 complaint cases with no obvious indicator of vulnerability. The results show all aspects of the complaint – that is to say the main reason plus any additional reasons cited by the consumer or apparent from the file.
top 5 features of complaints: vulnerable customers remainder of the sample • lender ignored/did not • allegation of fraud accept repayment plan • poor customer service • damage to credit record • aggressive chasing for debt • poor administration • high charges • poor customer service • unexpected/unauthorised • unexpected/unauthorised taking of funds taking of funds
“ Payday loans are not the first port of call for most people. There is something in the type of lending being offered – short-term and high-cost – that in itself suggests borrowers have a background of financial hardship or could be excluded from mainstream credit.”
Mark Hollands, ombudsman
Financial Ombudsman Service insight report Page 51 The sampled cases with no Repayment problems with 10 case study obvious indicator of vulnerability payday loans are quickly were much more likely to feature lender’s misuse of the CPA exacerbated because of the high complaints that the consumer on a customer in hardship charges and interest applied had not taken out the loan, on the debt, particularly when Mr N was having difficulty damage inflicted to their credit borrowers fall behind with their repaying a loan so he set up record, and poor administration. contractual repayments. For a repayment plan with his Unhappiness at poor customer example, almost all lenders lender. But this too was soon service and the unexpected charge an immediate late unaffordable and Mr N missed taking of funds was apparent payment fee or default charge a repayment. The lender then across the sample. on the first day a repayment is started to take funds from missed. These fees are currently The case studies below Mr N’s bank account through believed to range in size across illustrate examples drawn the CPA. This pushed Mr N the market from £8 to £30,61 from our sample of typical further into financial hardship though will clearly be affected complaints from vulnerable and left him struggling to pay by the new charging rules being consumers about debt essential bills. When Mr N introduced by the FCA from repayment plans and the made contact with the lender January next year. unauthorised taking of funds. he found them unhelpful and rude. Mr N’s complaint We repeatedly saw instances case study was upheld. The adjudicator where a rapid succession of ruled that the lender had not high charges meant that once a lender ignored attempts to exercised any forbearance borrower hit financial problems, set up a repayment plan and had misused the CPA. their debt had the potential to Following redundancy, Mr T hit The ombudsman service escalate quickly. And with many financial difficulties and made an award in consumers having more than contacted the lender to ask it compensation for the trouble one loan, the problem is often to freeze interest and charges, and upset caused to Mr N, magnified. The debt charity and to arrange a suitable and the lender was required StepChange, which helped more repayment plan. Mr T said to help set up an affordable than 66,000 consumers with these requests were ignored. repayment plan for him. payday loan debt problems in He complained that he was 2013, found that as many as encouraged to roll over the one borrower in five has five loan as a way of dealing with the ‘debt spiral’ or more payday loans running the problem. Although Mr T concurrently. As a wide range of research had told the lender about his has demonstrated, household It was also clear from the difficulties on four occasions finances can be fragile.60 And it complaints we reviewed that before the loan repayment was evident from the complaint many borrowers had taken date, the lender did not cases we reviewed just how out one payday loan to repay respond, and Mr T defaulted. quickly things can go wrong another. Four in ten consumers Mr T’s complaint was upheld for payday loan borrowers. in the vulnerable group we by the ombudsman service, It was not uncommon for a identified had had a previous and the lender was ordered consumer’s financial situation to payday loan. This figure fell to to reduce the outstanding be so precarious that a change just 27% among consumers balance to remove interest in circumstances, often only a whose complaints did not and charges applied after short-term change such as a show obvious evidence of Mr T had informed it lender temporary drop in earnings or a vulnerability. Consumers can of his financial difficulties. hospital stay, could lead to an clearly get stuck on a payday £100 was awarded in immediate and acute problem in loan treadmill.62 recognition of the trouble and their ability to repay their loan. upset caused by the lender’s failure to reply to the initial correspondence and ignoring Mr T’s emails requesting help.
Page 52 payday lending: pieces of the picture The following case study illustrates table 16a: did the consumer’s payday loan ‘roll over’? 10 the precarious nature of one consumer’s financial situation, in a yes 28% (77) scenario that was not uncommon no 52% (144) in our vulnerable group. unknown/not applicable 21% (57)
case study base: 278 complaints, omitting cases incorporating suspicions or allegations of fraud.
impact of a short illness on consumer’s ability to repay table 16b: if the consumer’s payday loan did roll over, his payday loan how many times did it do so?
Mr E had taken out a 1 32% (25) significant number of loans 2 16% (12) over an 18-month period 3 18% (14) with the same lender. He had 4 5% (4) been working and the loans 5 6% (5) had all been successfully paid on time. But Mr E 6 3% (2) was then unwell and was 7 1% (1) admitted to hospital for a 8 1% (1) number of weeks, meaning 9 1% (1) his income stopped and he 10 1% (1) was unable to repay his loan on the required date. more than 10 4% (3) Despite informing the unknown 10% (8) lender of this change in circumstances in advance base: 77 cases in which the consumer’s loan did roll over. of the repayment date, and requesting that his debt rollovers and top-ups As shown in table 16a , be frozen, the lender we found evidence in almost applied default charges and three in ten of the complaints rollovers continued to levy interest. we reviewed (28%) – excluding This caused Mr E’s debt to The majority of payday lenders those complaints featuring increase and he was unable allow borrowers to roll over an allegation of fraud – that to repay the balance. or defer their loan beyond its the consumer’s loan had been The loan grew to eight original repayment date. With rolled over. Of those that had times its original size. a rollover the borrower pays rolled over, about one in three Mr E complained to the the interest – or finance charge loans were rolled over once but ombudsman about the – on the loan but carries over two-fifths (42%) had rolled over charges. He had tried to set the principal loan amount, three times or more, as shown up a repayment plan with the extending it typically for one in table 16b . lender, but without success. month. The terms and conditions The complaint was upheld. of the loan remain the same and “ When things go The lender agreed to reduce typically a flat-rate fee is charged wrong a small loan the outstanding balance and for the process. can quickly grow to a set up a repayment plan. an eye-watering debt in a short space of time. High interest and charges can quickly push someone into a vicious spiral of debt.”
Juliana Francis, senior ombudsman
Financial Ombudsman Service insight report Page 53 10 Rollovers can be useful for In many of the cases we FCA regulation of the payday consumers as they allow them to reviewed, rolling over the loan sector, which began on avoid default fees and damage caused the borrower greater 1 April 2014, now restricts to their credit file if they are financial problems as the rollovers. Lenders cannot allow struggling to meet the loan debt increased fees and interest grew a loan to roll over more than in full on the repayment date. the total debt burden, as the twice. This should help to But sometimes a rollover can be following example illustrates. prevent borrowers’ debts from an early indicator of financial escalating to unmanageable difficulties or a sign that the case study levels. One ombudsman working borrower may have a problem in consumer credit believes that repaying the debt. And rollovers excessive rollovers some desperate borrowers might have raised other concerns. exacerbate consumer’s try to find ways to extend their In its review of the market, financial difficulties line of credit. He commented: the Office of Fair Trading, the The lender allowed Mrs L to “Some borrowers could former sector regulator, found roll over her loan more than transfer their debt elsewhere that rollovers were key profit 15 times. On each occasion a by borrowing from another drivers for lenders, accounting rollover or extension ‘fee’ was payday lender – effectively for around 50% of revenue. charged at £100, meaning rolling over, just with another It found that some businesses the small initial loan grew company.” The ombudsman were deliberately encouraging significantly to more than service will monitor this area borrowers to roll their loans over £1,500. The business argued and alert the FCA to systemic rather than repay.63 Mrs L had not informed it breaches of its rules. of her financial problems, but the adjudicator said the fact the consumer had “ Often a rollover is extended the loan on so many an indicator that occasions should have been a the borrower will clear indicator that there was struggle to repay the an underlying problem. debt. It is delaying The business did not offer the inevitable. Mrs L any other way of Unfortunately we clearing the balance and did sometimes see not refer her to debt charities. borrowers going The complaint was upheld. to different payday The outstanding balance was lenders to get the removed and compensation funds to repay their was awarded. previous loan.”
Robert, adjudicator
Page 54 payday lending: pieces of the picture top-ups consumer takes out initial loan of £100 on 1 June 10 A loan top-up is where the customer applies to borrow additional funds on top of their loan advance fee charged original or principal loan. But both debts – the principal customer tops up loan by £170 on 6 June loan and the top-up – will have the same repayment date – typically at the end loan advance fee charged for top-up of one month. In a similar way to rollovers, most lenders also charge a flat-rate fee to £353 loan repayment due on 30 June. top up a loan. consumer pays £72 of interest and rolls over the loan
The graphic opposite shows how rollovers and top-ups can roll over fee charged increase the total cost of the original loan. For simplicity, on loan repayment date, 30 July, we have chosen a consumer repays £363 capital and interest in full. straightforward example from Total repaid: £456 the complaints we reviewed, incorporating a single top-up and rollover. We saw many others however, where multiple top-ups and rollovers quickly figure 13: loans that were rolled over or topped up and significantly increased the 30% 29% consumer’s debt. 25% Overall, we found that vulnerable consumers were almost twice 20% 19% as likely to have rolled over 15% or topped up their loan, 15% as figure 13 illustrates. 10% 10%
“ Time and again we 5% see cases where 0% the consumer rolled over topped up is in difficulties vulnerable group remaining group but the business communicates poorly or applies its contract terms too rigidly. This table 17: was the consumer’s payday loan ‘topped up’? means problems can yes 18% (50) soon escalate.” no 64% (177) Stephen Cooper, ombudsman unknown/not applicable 18% (51)
base: 278 complaints, omitting cases incorporating suspicions or allegations of fraud.
Financial Ombudsman Service insight report Page 55 10 business practice payday lending industry customer charter Following intense political, regulatory and media pressure, If you are having problems repaying your loan we will: the payday lending industry • deal with cases of financial difficulty sympathetically and introduced a voluntary code of positively and do what we can to help you manage what you owe. practice, known as the ‘Good freeze interest and charges if you make repayments under Practice Customer Charter’, • a reasonable repayment plan or after a maximum of 60 days in November 2012. The of non-payment. Finance & Leasing Association, Consumer Finance Association, • tell you about free, independent debt-counselling the Consumer Credit Trade organisations who can help you. Association and the British Cheque & Credit Association, The qualitative interviews we One ombudsman described trade bodies which represent undertook with ombudsmen some businesses as 90% of the payday lending and adjudicators as part of “intransigent” and unable to sector, are signed up to the our research suggests there is look at the personal stories Charter. widespread poor practice by behind the problems. He said he Our review of complaints, lenders in their treatment of saw many cases where lenders however, revealed a very mixed those in hardship. Clearly, it is had not applied their code of picture of business practice. worth acknowledging again that practice. Another described There was evidence of both the ombudsman service deals some businesses as having good and bad practice in with entrenched complaints. a “cavalier attitude” towards almost equal measure. In the We might be expected to see those in hardship, commenting ‘vulnerable’ complaint cases, the worst end of the market, that: “Businesses are quick we found that 30% had handling instances where the to point to the contract and observable characteristics of borrower-lender relationship rule book when it suits them. good practice by the business, has broken down. But then they take free rein such as freezing interest when it comes to clawing But other research does tend rates and charges, writing off back cash, regardless of a to corroborate our finding that or reducing part of the loan person’s financial situation some lenders do not always balance, or referring consumers and ability to pay.” treat struggling borrowers to free debt advice services. sympathetically.65 During its But in 31% of cases the lender forbearance regulation of the industry, for demonstrated poor practice, out example, the Office of Fair of keeping with the Charter. However, ombudsmen and Trading found that attitudes And in the remaining 38% of adjudicators also pointed out to forbearance varied and that cases, it was not possible to that in many cases businesses only one fifth of the lenders had discern evidence either way.64 do adhere to the customer specialist teams in place to deal charter, and our sample with financial hardship.66 evidenced examples of good practice by lenders dealing sympathetically with borrowers in hardship or in vulnerable situations, and showing forbearance.
Page 56 payday lending: pieces of the picture Sometimes, consumers can A reluctance to deal with debt Adjudicators told us during 10 exacerbate their own debt problems, or to negotiate with our review that for some problem by not tackling the lenders, can make the issue consumers there is still a issue early enough. worse for borrowers, as the stigma attached to suffering Debt advisers reported to next case study from our serious debt problems and in the Office of Fair Trading that, sample shows. using payday loans. They say on average, consumers had this might explain why in some rolled over their loan four times case study cases consumers seek help before seeking independent very late. One adjudicator said: help.67 One ombudsman proactive lender tries “Sometimes a consumer has described some borrowers to help a customer with hidden loans from their partner as “burying their heads in debt problems or other family members. the sand” about their debt Miss A took out a payday loan Eventually they’ve been found problems. He said: “Months, but, due to a change in her out, typically because the debt or even years, can roll by and the circumstances, was unable level is out of control.” consumer has done nothing to to pay it back. She asked There is also a well-established get in contact with the lender.” the lender if she could enter link between debt and into a debt repayment plan depression. According to debt which the business accepted charity StepChange, at least half “ Some lenders are – freezing all interest and of those in debt feel anxious unaware of the rules or charges. The lender also or depressed.68 Research also guidance that should referred the consumer suggests that people with debt be followed when to a free debt charity. and mental health problems it comes to dealing Miss A made no payment. often don’t seek help for She then contacted the with vulnerable financial difficulties and don’t lender to negotiate a reduced consumers.” disclose information about such monthly repayment. illnesses to creditors due to Mark Hollands, ombudsman The lender agreed to the embarrassment or fear of not reduced offer but the being believed.69 repayment plan was not honoured by Miss A. Miss A complained and said there had been a lack of assistance from the business. The adjudicator did not uphold the complaint and judged that the lender had not been unhelpful or inconsiderate of the consumer’s financial difficulties.
Financial Ombudsman Service insight report Page 57 In some of the complaints 10 case study we reviewed, such as the following case study example, consumer makes little contact the consumer appeared to be with his lender over a period evasive, making it extremely of many months difficult for the lender to understand the extent of Mr Y took out a large loan their personal situation. but did not repay on the due date. No contact was made with the lender for many months. After Mr Y “ People are often did eventually make contact, embarrassed to be the business suppressed using payday loans, interest and charges. although for many But it was particularly difficult consumers it is their for the lender to set up an only option.” agreed repayment plan with the consumer and, Robert, adjudicator when arrangements were put in place, Mr Y did not stick to them. The consumer complained about adverse markers on his credit file and said the business should have been more helpful. The adjudicator did not uphold the complaint and considered that the settlement offer the business had already made was fair and reasonable. He also said the credit file information was correct and an accurate reflection of Mr Y’s payment history.
Page 58 payday lending: pieces of the picture chapter 11 referral rights and post-decision contact
Financial Ombudsman Service insight report Page 59 11 referral rights and post-decision contact
The way in which businesses treat their customers during complaints can be indicative of the value they place on customer service. A central part of the official complaints procedure is the ‘final response letter’, and our review uncovered serious problems with misleading information or letters routinely not issued. In this chapter we put the spotlight on business practice and firms’ proactivity during complaints. While there are plenty of examples of good practice, most payday lenders must do more to improve complaints handling.
snapshot • More than half of reviewed complaints did not have a final response letter in the complaint file. It either had not been issued or was not available. • In four in ten complaints, lenders had given consumers their full referral rights – and within the eight-week time frame. • In almost a fifth of upheld complaints, the consumer had to contact the ombudsman service after the resolution of their complaint because the business had either not paid redress or had failed to correct the information on their credit file.
final response letters
When any regulated financial
services business receives a final response within eight weeks complaint – or any expression of dissatisfaction – from a If the business cannot resolve the complaint by the end of eight customer, which it is unable to weeks it must send the complainant: resolve by the end of the next A copy of the Financial Ombudsman Service’s standard business day, it must send its explanatory leaflet, and inform the complainant that if he remains response within eight weeks. dissatisfied with the business’ response, he may now refer his Whether the business is able complaint to the Financial Ombudsman Service and must do so to offer a solution, rejects the within six months. complaint, or even if it has been Alternatively, it must send: unable to investigate within the time frame, it must send A written response which: (a) explains why it is not in a position written acknowledgement to make a final response and indicates when it expects to be to the consumer. able to provide one; (b) informs the complainant that he may now refer the complaint to the Financial Ombudsman Service; and (c) encloses a copy of the Financial Ombudsman Service standard explanatory leaflet. DISP 1.6.2 Financial Conduct Authority
Page 60 payday lending: pieces of the picture Most importantly this ‘final The findings of our latest review Incomplete or absent 11 response letter’ must include echo previous ombudsman referral rights are a problem. ‘referral rights’. This will clearly service research into the If consumers are not given full explain to the consumer that provision of referral rights referral rights by businesses, they have the right – whatever within payday loan complaints. 70 many will not know they the business’s decision on their Adjudicators and ombudsmen can bring their case to the complaint – to escalate their feel the issue is largely due to ombudsman service where case within six months to the businesses’ inexperience and their complaint will be given an Financial Ombudsman Service a lack of awareness of the rules, independent hearing. There are for an independent decision. rather than a deliberate attempt also risks for firms themselves. This legal minimum requirement to prevent consumer complaints The final response letter sets the is covered under the Financial coming to the ombudsman. clock ticking on a complaint – Conduct Authority’s Dispute An adjudicator told us: “Lenders after six months the case will be Resolution rules – known as ‘DISP’. seem unsure of their obligations time-barred and the ombudsman rather than wilfully contravening service will no longer be able to The full guidance from the the rules. Compliance probably consider it. If a business fails FCA handbook for businesses isn’t a key focus for some of to inform the consumer of their is shown on page 60. these businesses, many of which referral rights, the complaint In just under half of the are start-ups and very small.”71 remains ‘live’ and that consumer complaints we reviewed, the could choose to bring the Not all of the practice we consumer had been given full complaint to the ombudsman at observed was poor. Among referral rights within the eight- any point in the future. the complaints reviewed in our week time frame permitted. sample, for example, some firms In the remaining half of cases issued full referral rights on time there was a mixed picture of in a high proportion of cases. practice. In some cases referral This compares to some other rights had not been given lenders who met this standard in at all, or were incomplete or fewer than 20% of complaints. misleading. Other letters were issued outside the allotted eight- week timeframe – in breach of FCA rules. Worse, in a significant proportion of complaints, a final response letter was not issued at all, and in other cases it was not available within the case file.
Financial Ombudsman Service insight report Page 61 11 what we expect to see Please note that according to our Complaints Procedure, this is Here are two examples of final our final response. If you are unhappy with it, you may refer your response letters drawn from complaint to the Financial Ombudsman Service. our sample of complaints. Both businesses had You need to do this within six months of the date of this letter. investigated and set out their For more information please visit conclusions in the final response www.financial-ombudsman.org.uk/publications/consumer-leaflet letters. They both comply with The address of the Financial Ombudsman Service is: DISP and set out referral rights Exchange Tower London E14 9SR to the consumer along with the six-month time scale. Once again we apologise for the inconvenience you have been caused and hope that you will find the points above as a fair resolution to your complaint.
misleading final final response response letters If you remain unhappy with my reply I am enclosing a leaflet about the Financial Ombudsman Service. But we also uncovered worrying practice. Examples included Should you choose to contact them, you will need to do so within lenders not issuing a final six months from the date of this letter, enclosing a copy of my response letter at all, or sending response, which they will need for their investigation. the letter late – after eight Please do not hesitate to contact me should you require any weeks had elapsed since the further assistance. You can email me on ... complaint. Moreover, about one in ten of the final response letters we reviewed had either incomplete information (for example a failure to mention the six-month time limit for bringing a complaint to the ombudsman), or were misleading. Particular examples of the latter were those final response letters which guided consumers towards alternative complaints procedures. The excerpt on page 63 from a final response letter illustrates just such an example, referring the consumer to the complaints procedure of the lender’s trade body – the British Cheque and Credit Association (BCCA) – and not making it clear that the consumer could take their complaint straight to the ombudsman service. In this particular case we raised our concerns with both the firm and the FCA to ensure best practice.
Page 62 payday lending: pieces of the picture Some of the final response 11 letters we reviewed were so poor and lacking in clarity that the consumer or adjudicator had to query with the business whether it was in fact their final Please note that under the terms of our complaints procedure this response. It is important to know is our final response. If you are dissatisfied with the way we have exactly when a final response is handled your complaint, you can go to stage 2 of the procedure issued as this letter marks the by referring your complaint to the BCCA which is our Trade start of the six-month window Association and acts on our behalf. for cases to be considered at The BCCA will investigate your complaint and will provide you with the ombudsman service. a final response within four weeks of receiving notification of your In other final responses, continuing dissatisfaction. businesses referred to previous We will regard your complaint as closed if the BCCA does not complaints against them that receive a reply from you within eight weeks of our final response. had not been upheld by the ombudsman service. Because If you are dissatisfied with the final response from the BCCA you each complaint is individual, can ask the Financial Ombudsman Service for an independent and is assessed on its review. The BCCA will enclose a leaflet from the ombudsman in own merits, it is extremely their final response letter to assist you if you decide to pursue misleading to refer to past cases this further course of action. You should contact the Financial and imply that the ombudsman Ombudsman Service within six months of receiving the final will arrive at the same outcome, response from the BCCA. and risks deterring consumers from pursuing their complaint.
One lender in our sample even referred to the Financial Ombudsman Service as ‘colleagues’. While this reference was not made in a final response letter, it was included in the adjudicator’s opinion to the business business’s correspondence I have now reviewed the email correspondence which the business to the consumer during their sent to Ms C during her complaint. complaint. Again, adjudicators and ombudsmen say this is In an email sent to Ms C it referred to the OFT* and the Financial misleading. They point out Ombudsman Service as its colleagues. it is essential for consumer trust in the process for I feel the use of the word ‘colleagues’ is misleading as it gives the consumers to understand impression that we work with businesses and may cause Ms C to that the ombudsman service feel any assessment of her complaint may be biased. is independent and impartial This is not the case. We are an independent complaints and that their complaint will organisation and the OFT is the regulator. have a fair hearing.
* The FCA assumed responsibility for the regulation of consumer credit from the OFT in April 2014.
Financial Ombudsman Service insight report Page 63 11 While some lenders clearly post-decision contact act responsibly when faced with a complaint, the failure of The ombudsman service’s parts of the market to deal with decisions are based on what we complaints correctly is not just believe is fair and reasonable bad news for the consumer, in the circumstances of each but bad news for the industry. individual case. We take into Previous internal research we account the law, rules, codes have undertaken had identified and good practice that applied at the inconsistent quality of the time of the event complained payday lenders’ final response about. We look at all the relevant letters and their provision of facts and arguments, ask both referral rights as a problem. the business and the consumer Our latest review has underlined for their views, and listen to it. We will be keeping a close each side of the story. eye on this issue and will share After drawing together all the examples of continuing poor evidence, we will let both parties practice with the regulator. know what we think – on the balance of probability – is the most likely version of events. In most cases, both the consumer and the business accept our adjudicator’s view and the complaint is settled.
In some instances, however, consumers whose complaint we have upheld contact us to say that the business has not yet taken the action we have recommended. As table 18 shows, in almost a fifth of the upheld complaints we reviewed, the consumer had to contact the ombudsman service again72 because the business had not followed through on the ombudsman’s decision – typically by not having paid the redress owed or by not having amended entries on a consumer’s credit record as directed.
table 18: has the consumer contacted the ombudsman post-decision about unpaid redress (at least one month after the decision)? yes 18% (38) no 82% (177)
base: 215 upheld complaints, including cases incorporating suspicions or allegations of fraud. The ‘yes’ value includes instances of consumers contacting the ombudsman about a lender’s failure to amend entries on the consumer’s credit record.
Page 64 payday lending: pieces of the picture chapter 12
live issues
Financial Ombudsman Service insight report Page 65 12 live issues
The findings of this report are based on complaints against payday lenders which the ombudsman service dealt with in 2013/14. But this is a fast-paced market and products and business practice are changing. A number of issues emerged during the interviews with ombudsmen and adjudicators which did not feature strongly in the casework review. This chapter highlights some of those issues and gives a snapshot of where the market is now – and where it might be heading.
affordability at And a survey by the Personal One explanation for the growing the point of sale Finance Research Centre at visibility of unaffordability the University of Bristol found complaints could be greater The unaffordability of a that although the majority consumer awareness of a loan at the point of sale is a of consumers were asked for lender’s obligation to ensure a growing feature of payday information to help the lender loan is affordable at the outset. loan complaints, according assess affordability, only a It is something the Financial to ombudsman service minority of businesses (9% Conduct Authority made adjudicators. The issue did of online lenders) asked for mandatory when it took over feature in the complaints physical proof of income, such regulation of consumer credit in we reviewed but was not a as bank statements.74 April 2014. And the forthcoming prominent theme overall cap on the total cost of credit, Ombudsmen say unaffordability (discernible in 7% of cases when due to be brought in by the FCA has not played a significant all features of the complaint from January 2015, has also part in the payday complaints were taken into account). had extensive media coverage. received to date mainly This could have had the effect of because of the way consumers This is perhaps surprising boosting complaints about loan frame their complaint. One given the extent of media costs and affordability. coverage and consumer commented: “It feels unlikely campaigning on the subject. that a consumer would say ‘I The debt charity StepChange, couldn’t afford this loan, they for example, is just one of should not have given it to me’, the bodies that has raised particularly when they are in a concerns about affordability difficult financial situation and and irresponsible lending. It desperately need the money. recently found consumers with But when you scratch beneath payday loans seeking its help the surface of many complaints had average debts of £1,647, affordability is often found to be against these borrowers’ the root cause of the problem.” average net monthly income of £1,381.73 “ Some businesses don’t make enough effort to check if loans are affordable, and some consumers don’t realise they are required to.”
Stephen Cooper, ombudsman
Page 66 payday lending: pieces of the picture The following case study from Better data sharing, 12 our review sample is a prime combined with more rigorous example of where a lender had regulation, should improve not applied sufficient checks the effectiveness of lenders’ on affordability. affordability assessments. Russell Hamblin-Boone, chief case study executive of the Consumer Finance Association, one of the Initial loan advanced trade bodies representing the was almost as big as the payday lending industry, consumer’s income has said of Callcredit’s real-time Mrs R complained on behalf credit reporting database: of her son because a loan “We support real-time credit had been issued which she checks as they will help lenders felt was unaffordable. The not only to identify customers lender had given the borrower who can afford to repay a loan a loan which was almost but also those who apply for equal to his total net monthly credit in the full knowledge that income. This was despite they can’t afford it”.75 the borrower declaring his income on the application form. The borrower had got in to difficulties and interest and charges had more than doubled the outstanding balance. It had been referred to a debt collector prior to the complaint. The case was upheld. The adjudicator said he had ‘significant concerns’ about the adequacy of the lender’s assessment of the borrower’s ability to repay.
Financial Ombudsman Service insight report Page 67 12 product innovation instalment loans flexible accounts Ombudsmen and adjudicators Wonga, the biggest payday With a ‘flex’ or running credit report a shift in emphasis by loan brand in the UK with an account the consumer takes a some payday lenders away from estimated 20% to 30% share loan with flexible repayment the traditional 30-day payday of market revenue,76 started terms. The loan operates more model into different products, trialling six-month instalment like a credit card than a loan. such as short-term (two, three loans in a pilot scheme offered Typically there is a minimum or six-month) structured loans to existing customers earlier monthly repayment required. or running credit accounts, this year.77 And US-owned Crucially, because it is a running sometimes known as flexible lender SRC Transatlantic Ltd told account with no end date, a or ‘flex accounts’, possibly the Competition and Markets lender can set the minimum in response to new FCA rules Authority during its market payment to cover just the capping rollovers. As one investigation that the US market interest and a small proportion adjudicator commented, had ‘evolved towards instalment of the balance (typically about “Rollovers are a big source of products’ in recent years.78 2% of the principal loan). The revenue for lenders. If this dries But other providers may not loan then continues from month up it stands to reason they’ll follow. Another payday lender to month with the same terms want to adapt the product told the CMA that regulatory and conditions. or look to offer something change and uncertainty were different”. But the extent to One adjudicator said that likely to stifle innovation and which this evolution will spread “it is the same as deferring or that firms were “putting plans to across the market – if at all rolling over the loan in all but launch new products on hold”.79 – is inherently uncertain. name. The consumer can end up Other independent analysis repaying only the interest each suggests a cap on the total month – making just a small cost of credit will cause some dent or never paying down the lenders, particularly smaller original capital of the loan”. businesses, to exit the market altogether.80 Complaints about this type of flexible account were visible in our study in small number. But adjudicators expect “ More lenders are complaints in this area to grow. offering short-term One of the reasons cited by structured loans and adjudicators is the increased running accounts with complexity of the product. an ongoing line of In the recent complaint to the credit. This is possibly ombudsman featured in the in response to tighter case study on the opposite FCA rules on rollovers.” page (which is not drawn from our review sample but included Robert, adjudicator as an illustrative example), the consumer was unaware that by only paying the minimum repayment required each month they would never pay off the principal loan.
Page 68 payday lending: pieces of the picture case study claims management credit broking 12 companies confusion over minimum The Competition and monthly repayments meant Claims management companies Markets Authority’s market loan did not reduce (CMCs) will naturally look to investigation recently found that different product areas to drive a “substantial proportion” of Mr D argued that the structure new business, especially as the online payday lending customers of his loan – a flexible running volume of payment protection use intermediaries – such as account – was misleading. insurance (PPI) cases starts credit brokers – to apply for The initial loan agreement to decline. There has been a loan, yet many consumers had given an example of speculation that payday loan are unaware of the nature of monthly repayments but borrowers could be a source of the service with which they this was only the minimum new complaints. are being provided.81 repayment required and it Many consumers assume only covered the interest Adjudicators and ombudsmen that the broker is ‘shopping owed. It meant Mr D had have seen a small number of around’ on their behalf to find been paying only the interest complaints brought by one CMC. the best deal, when in fact on the debt each month. But to date the caseload driven the broker or lead generator Despite having the account by this form of representation auctions the customer’s for more than two years and has been small. Nevertheless, application to a panel of lenders paying hundreds of pounds adjudicators and ombudsmen – selling to the business that is in interest, the original loan report that some payday lenders willing to pay the most. amount had never been paid believe that more CMCs are set off. At first the lender argued to try their hand in this market. The ombudsman service has the terms were clear but after seen a significant increase So far, ombudsmen feel lenders’ the ombudsman service’s in the volume of calls from predictions should be less firm. intervention it agreed the consumers about problems One said: “We see very little loan documents at the they have experienced with activity from CMCs in payday outset had been misleading. credit broking services. loans. It isn’t usually worth their The complaint was upheld. In the 2013/14 financial year while as the margins are low The lender was ordered to we received 5,873 enquiries compared to PPI and packaged refund some of the overpaid from consumers about credit bank accounts, and there is interest and close the account. broking. Just over three months quite a bit of work involved into the new financial year82 researching affordability cases.” we had already received 5,932 That said, potential CMC interest enquiries, exceeding the total for will linger – particularly as the whole of the previous year. PPI complaints fall away. It could be that CMC activity in payday loans has yet to filter through in the cases seen at the ombudsman service.
Financial Ombudsman Service insight report Page 69 Figure 14 relates to all types of 12 figure 14: credit broking enquiries credit broking enquiries handled by the ombudsman service, but a 6,000 5,932 5,873 high proportion relate to broking services connected to payday 5,000 loans. A common feature of the 4,000 calls we receive is for consumers to have paid a significant up- 3,000 front fee to a broker, for example £70, as they think this is the 2,000 only way to get a loan they need. 1,000 Sometimes the broker arranges a payday loan – usually through 0 a lender who would have lent 6 April to 21 July 2014 financial year 2013/14 the money to the consumer without any upfront fee had Despite the high volume of the consumer contacted them credit broking enquiries, directly. But often the consumer very few (approximately 6%) does not end up with any loan at convert into complaints. all, and in either scenario they Part of the reason for the low have lost the £70. In many of complaint conversion rate is that the enquiries we have handled, the majority of businesses return the consumer was not even or refund the fee charged when told about the fee, and merely contacted on the consumer’s gave their bank details to the behalf by the ombudsman broker who requested them service. The uphold rate for “for verification”, and only later the credit broking complaints found out money was taken. the ombudsman service does In the most worrying examples, resolve is high, at 71%. the broker which took the initial Again, in the complaints that money from the consumer are not upheld, this is often appears to be selling on the because the business has consumers’ data to other already refunded the fee the brokers, which then also levy consumer has paid, or has their own fees. Consumers offered to refund the fee. have also expressed anger at Due to the sheer volume of harassment by phone and text consumer enquiries we are message by various brokers and receiving, and the nature of lenders as a result of their initial some of the business practice contact with a broker. we are seeing, this is an issue we are monitoring closely.
“ With tightened affordability checks, the cap on rollovers and soon a cap on the total cost of the loans, payday lenders are feeling the heat of greater regulatory attention. I’d expect to see some big changes in the industry. Only the strongest will survive.”
Juliana Francis, senior ombudsman
Page 70 payday lending: pieces of the picture chapter 13
conclusions
Financial Ombudsman Service insight report Page 71 13 conclusions
The complaints that we resolve at the ombudsman service give us a particular perspective on the financial services industry. While the volume of calls to our helpline allows us to tap into consumers’ emerging worries, by the time worries crystallise into complaints we inevitably find ourselves dealing with issues that businesses and consumers could not resolve. Our service comes at the end of a process when complaints are often entrenched. This is as true of complaints about payday loans as it is about other financial products. That acknowledged, our review of payday lending complaints has generated useful insight for us to share with others – some expected, some not. This chapter summarises what we found.
Our review of consumer business practice The complaints we reviewed complaints into payday loans revealed repeated evidence found many recurring and The prominence of complaints of lenders displaying poor interlinked themes. Some of about poor business administration or demonstrating these were familiar. Complaints administration was unexpected, little concern for customer care, about lenders’ use of continuous for example. Looking at the with standards routinely falling payment authorities, and main reasons for consumers’ below a level that many would complaints from consumers complaints to the ombudsman, consider reasonable. This simply who say they did not take dissatisfaction with a lender’s isn’t acceptable. out the loan they were being administrative processes was twice as significant as chased to repay, are issues what can businesses do? the ombudsman service has unhappiness over high charges End poor administration. highlighted previously.83 and interest rates – an issue • Lenders should not be causing But some of what we found which tends to command far more their customers undue trouble was less predictable. political and media attention. and upset because of poor Poor customer service did not systems and process. Putting feature prominently among resources into improving this “ Poor administration the main drivers of consumers’ area should reap rewards in and customer complaints about payday customer satisfaction. lending. This is not especially care simply isn’t surprising. In the context of the culture change acceptable.” issues many payday borrowers Financial Ombudsman Service face, pursuing a complaint about The new regulatory regime for poor standards of care, or plain payday lenders introduced rudeness during a phone call, by the FCA will tackle notable may seem a lower order priority. abuses of the system. But when all observable features But addressing poor of complaints were analysed, administration and poor poor service shot up the table: customer service are things only topped by damage to credit that the industry can do records as the most frequently- independently of regulatory occurring issue. intervention.
Page 72 payday lending: pieces of the picture It is something we have seen in This is an obvious worry: if We have highlighted examples 13 other areas of financial services. consumers are not given full of good practice in our report. Major banks and insurers have ‘referral rights’, many may not But too often we saw cases of had their reputations tarnished know that they can bring a consumers in financial difficulty in the past over various complaint to the ombudsman. being treated unsympathetically. misconduct issues, not least In almost one in five of the cases Our findings here are consistent the mass mis-sale of payment we reviewed, the consumer with an earlier internal review protection insurance. Consumer was complaining because they we conducted on this issue, trust and respect was dented were struggling to repay and and we have been talking even further following the the lender had refused to accept with the industry to help credit crisis. But many financial their debt repayment plan. improve practice. But firms’ businesses have attempted to A similar proportion of cases obligations are simple and address the problem, investing featured a complaint about clear. If businesses continue resources in customer service aggressive debt chasing. to fail to signpost consumers and changing the culture inside This is unacceptably high, appropriately to the ombudsman their own organisations to and we know these issues are service, we will refer them to ensure the customer is put front firmly on the regulator’s radar. the regulator. There must be no and centre of the operation.84 unnecessary barriers between This consumer-focused approach what can businesses do? consumers and their entitlement could helpfully be applied more to have their complaint Help vulnerable consumers. widely in the payday lending • independently reviewed. Some consumers find industry.85 themselves in considerable what can businesses do? financial difficulty. It is in what can businesses do? everyone’s interest to work Make sure consumers know Make customers central to the • together to find solutions, • their rights. Full ‘referral rights’ business. If a customer feels such as setting up viable debt are still not being provided the need to raise an issue repayment plans, rather than consistently. The ombudsman with a business, the business ignoring the problem and service is working with can often stop dissatisfaction continuing to chase for debt. businesses to raise standards escalating by listening and in final response letters and trying to put things right early. will continue to flag poor understanding of practice to the FCA. credit files awareness of the help available from the In its recent market vulnerable consumers investigation, the Competition ombudsman and Markets Authority raised Many organisations, especially issues about consumers’ In the context of the relatively consumer-focused groups misunderstanding of different small number of complaints we such as Which? and the debt types of credit search and what receive about payday lending advice charity StepChange, impact they have on consumers’ compared to the number of have repeatedly highlighted credit files and credit scores. loans issued, we are extremely concerns about lenders’ The CMA is consulting on concerned at what our review handling of vulnerable possible ways to address revealed about the consistency borrowers. Complaints about the problem.86 with which lenders appropriately businesses’ poor treatment of flagged consumers’ ultimate those experiencing financial right to have their complaint hardship also featured strongly independently heard. In fewer in our review. We uncovered than half of the complaints a very mixed picture of good, that we reviewed could we be satisfactory, unsatisfactory confident that consumers had and – at the extreme end been given the right information – appalling treatment of within the right timeframe. borrowers in difficulty.
Financial Ombudsman Service insight report Page 73 “ There is a still a stigma attached to having debt problems. This can often be even more acute for those 13 We saw a strong echo of this who have used payday lenders. Many consumers are lack of clarity in our own review. embarrassed at the situation they are in.” One of the biggest themes emerging from the complaints Robert, adjudicator we examined was consumers’ supporting consumers our own response lack of understanding about how credit files and credit reference As a service, we too often see The work we have done to inform agency information work in consumers who end up in a this insight report has also practice. It is a complex area and situation they feel embarrassed informed the approach of our presents challenges well beyond about or are too ashamed to own service. We already run an payday lending. It is possible confront their debt issues early. extensive consumer outreach individual businesses could do It is important people don’t programme and training more to avoid some complaints feel trapped with nowhere to events for consumer advisers by being clearer with consumers turn because of the stigma across the UK, from Crawley to on their approach, for example by sometimes associated with Conwy, Truro to Dundee. We are giving greater notice ahead of a payday loans. Consumers should complementing that work with registering default. But generally not be afraid to ask for help and a new drive to raise consumers’ it is clear that more could be done should speak up sooner rather awareness of the help we can to improve public understanding than later before problems get offer to those experiencing of how credit systems operate, out of hand. problems with payday loans. particularly among vulnerable We are experimenting with new groups and those who have had consumers can make ways in which we can offer that problems with credit. things better by: help in the handling of consumer enquiries and complaints. And Seeking debt help early. It is • we are working directly with what can businesses do? easy for debts to spiral out of payday lending businesses to control quickly. Consumers • Work with credit reference improve their understanding of who experience problems agencies to ensure that our approach and to help them with their loan should make consumers’ credit files are better serve their customers. accessible, transparent and their lender aware as soon as easy to understand. More possible. Lenders can freeze Above all, we have a renewed needs to be done by industry interest and charges and set determination to work in and the credit reference up a reasonable repayment partnership with regulators, agencies to improve clarity plan. Consumers can speak the industry, parliamentarians, and build consumers’ to their bank as well as debt charities and consumer understanding in this area. creditors – the bank can bodies, to help bring together It is particularly important for cancel a CPA, for example. those best placed to tackle those who have experienced • Not being afraid or ashamed problems in the sector, to impaired credit in the past. to complain. The ombudsman improve business practice service is here to help and and to help those consumers can guide you through the who find themselves in difficulty. process. “ The ombudsman We will not hesitate to refer service industry • Getting free and independent to the regulator businesses seminar was well debt advice. Debt that continue to flout their structured and advice charities, such as obligations or who demonstrate useful. It was good StepChange, can help, or get unacceptable practice. This is our to liaise directly with in touch with the ombudsman. duty. But there is a clear need adjudicators and We can point you to people for collaborative action to broker ombudsmen.” who can help you get on top solutions. As a service, the of your debt problems for free. ombudsman intends to play a full payday lender The Money Advice Service and active part in that effort. also has information and advice to help consumers get their finances back on track.
Page 74 payday lending: pieces of the picture annex 1
about us
Financial Ombudsman Service insight report Page 75 about us annex 1 annex
The Financial Ombudsman Service can: • look at consumer complaints which cannot be resolved by the business. • award redress up to £150,000. • make modest awards to complainants for trouble and upset. • consider cases up to six years from the event the consumer is complaining about, or if later, three years from when the consumer knew, or could reasonably have known, they had cause for complaint.
background how we handle how we work
The Financial Ombudsman complaints with the regulator Service was set up under the The ombudsman deals with The Financial Ombudsman Financial Services and Markets complaints that have not been Service has a duty to inform the Act in 2000 to resolve individual resolved by the business. FCA if it has information which consumer complaints against Consumers must first direct might be of assistance to it. financial businesses, such their complaint to the business, We regularly send the FCA as banks, insurers, mortgage giving it eight weeks to respond. details about the number and lenders, credit card providers If after eight weeks there has not types of complaints handled and independent financial been a satisfactory resolution and also flag any serious advisers. the consumer can bring the case concerns we have about a to the ombudsman. Cases must firm’s complaint-handling The ombudsman service is be brought to the ombudsman or the fitness and propriety of independent and impartial and within six months of the a firm or approved person, makes decisions on the merits business’s final response letter. and any other issues that may of each case and on the basis of require regulatory action. what is fair and reasonable. An adjudicator will assess the We also regularly answer complaint and give an opinion The ombudsman deals with specific requests from the FCA either to uphold or reject it. disputes about all kinds of when they are investigating This decision can be appealed money matters involving particular issues or businesses. by either side – consumer or regulated financial services business. An ombudsman providers. It dealt with 512,167 will then review the case and complaints in the 2013/14 give a final decision, which is financial year. legally binding. The service is free to consumers. The Financial Ombudsman It is funded through a Service is not a regulator. combination of a levy on the It does not write rules for industry and case fees. financial businesses or fine them if rules are broken. This is the role of the financial regulator, the Financial Conduct Authority (FCA).
Page 76 payday lending: pieces of the picture references
Financial Ombudsman Service insight report Page 77 chapter 1 Once consent is given, the business 20 The vast majority (97%) of complaints does not need to seek permission each brought to the ombudsman service 1 Source: Competition and Markets time it requests a payment. The day and on consumers’ behalf by claims- Authority, Payday lending market amount of money taken via a CPA can management companies in 2013/14 were investigation. Provisional findings report, vary each time. complaints about payment protection June 2014, p. 12. 9 Financial Conduct Authority, Proposals for insurance (PPI). The ombudsman service Ibid., paragraph 14, p. 12. 2 a price cap on high-cost short-term credit, emphasises to consumers that they don’t 3 Financial Conduct Authority, Proposals for Consultation Paper CP14/10, July 2014, need the help of a claims-management a price cap on high-cost short-term credit, paragraph 1.8, pp. 6-7. company to bring a complaint. We look at Consultation Paper CP14/10, July 2014, the facts, not at how “professionally” a 10 Ibid., Box 1, p. 61. paragraph 3.8, p. 16. case is presented to us – and we prefer 11 Financial Conduct Authority, Proposals to hear from people in their own words. 4 Total UK consumer credit (excluding for a price cap on high-cost short-term We do everything we can to make our mortgage lending and student loans) credit, Consultation Paper CP14/10, service as straightforward as possible stood at £160.6 billion in May 2014. July 2014, Box 1, p. 61. The Consumer to use. So while consumers may choose Source: Bank of England, Money and Finance Association has been quoted as to have someone represent them, we Credit: May 2014, Statistical Release, expecting the sector to shrink by about do things in a way that makes sure it is 30 June 2014. Research by the Centre half in the coming years. See: “Watchdog not necessary. We found no evidence for Social Justice using Bank of England set to unveil details of cap on UK payday that complaints brought to us by a data showed that total UK household loan charges”, Financial Times, claims manager in the last financial year debt (excluding mortgages) rose from 13 July 2014. were any more likely to be upheld. See: £5,495 per household in 2001 to Financial Ombudsman Service, Annual £6,007 in 2012. See: Centre for Social Review 2013/14, May 2014, p. 39. Justice, Maxed Out: Serious personal chapter 2 debt in Britain, November 2013, 12 The ombudsman service handled 21 See “Ombudsman urges people to p. 33. A Populus poll of 6,300 people for 2,357,374 initial enquiries and confront their fears and speak up about Which?, conducted between December complaints from consumers in 2013/14, payday loan debt”, Financial Ombudsman 2013 and February 2014, found that one almost 8,000 each working day. Of these Service media release, 8 July 2014. in six families were covering essential enquiries, 512,167 turned into a formal 22 This trend was also clearly visible in the costs with payday loans or unauthorised dispute, with 78% of new cases being consumer survey undertaken as part of overdrafts, or were defaulting on about the sale of payment protection the former Competition Commission’s household bills. Two in five people (40%) insurance (PPI). Source: Financial payday market investigation, where 79% were worried about household debt. See: Ombudsman Service, Annual Review of payday customers had taken out more “1 in 6 families struggling to pay bills in 2013/14, May 2014, p. 1. than one loan, with 66% having taken poorest areas”, The Guardian, 13 Competition Commission/TNS BMRB, out three or more loans. Interestingly, 17 July 2014. Research into the payday lending market. although most customers had taken out 5 The Poverty and Social Exclusion research Report, January 2014, p. 16. more than one loan, the majority (55%) of project, funded by the Economic and customers had only ever taken out a loan 14 Competition Commission/TNS BMRB, Social Research Council, found that more through one lender. See: Competition Research into the payday lending market. than 30 million people – almost half the Commission/TNS BMRB, Research into Report, January 2014, p. 22. population – are now suffering to some the payday lending market. Report, degree from financial insecurity. 15 Complaints against WDFC UK Ltd January 2014, pp. 32-33. The project, the largest study of poverty constituted just under 30% of the total 23 See: Competition Commission/TNS ever conducted in the UK, found that number of new complaints about payday BMRB, Research into the payday lending around a third of people suffer significant loans brought to the ombudsman by market. Report, January 2014, p. 37. financial difficulties and about one consumers in 2013/14. This seems to be Data on the size of loan comes from quarter has an unacceptably low in line with Wonga’s overall market share: transactional data supplied by payday standard of living. See PSE UK/Economic the Competition and Markets Authority lenders. and Social Research Council, The state that Wonga has a 30-40% share of 24 Loans extending beyond 31 days could Impoverishment of the UK. PSE UK first all loans by volume, and a 20-30% share be evidence of rollovers or similar loan results: Living Standards, March 2013. of total payday revenue. See Competition and Markets Authority, Payday lending extensions, or in some cases a sign 6 Source: Financial Conduct Authority, market investigation. Provisional findings of defaults and repayment problems. Proposals for a price cap on high-cost report, June 2014, paragraph 2.77, Financial hardship and vulnerability are short-term credit, Consultation Paper p. 2-26. explored further in chapter 10. CP14/10, July 2014, paragraph 3.12, 25 Clearly, this will not accurately reflect p. 17. Clearly, not all payday loan 16 Source: Financial Ombudsman Service, how the wider payday loan market customers will be experiencing difficult Annual Review 2013/14, May 2014, operates. A study undertaken by the financial situations, or will subsequently p. 83. former Competition Commission, for experience problems with their loan. example, found that 63% of customers A study undertaken by the former chapter 3 repaid their payday loans on time and did Competition Commission found that three 17 Competition Commission, Payday not require another loan in order to get in ten payday lending customers had an Lending Market Investigation. Statement by. See: Competition Commission/TNS annual household income of £36,000 or of issues, August 2013, paragraph 10, BMRB, Research into the payday lending more, and that 63% of customers repaid p. 2. market. Report, January 2014, p. 116. their loans on time and did not require another to get by. See: Competition 18 Financial Conduct Authority, Detailed Commission/TNS BMRB, Research into rules for the FCA regime for consumer the payday lending market. Report, credit, Policy Statement PS14/3, January 2014, p. 12 and p. 116. February 2014, p. 45. 7 Payday lenders may allow borrowers to 19 The similarity between the respective defer or extend their loan for another profiles is not surprising given that the month by paying the interest owed on the sample of cases analysed comprises such a due date. The lender will typically add a signification proportion of the payday loan rollover or refinancing charge. complaints considered by the ombudsman service in the last financial year. 8 A CPA represents the consent given by a consumer for a business (e.g. a payday lender) to make requests to the consumer’s payment service provider (e.g. their bank) for automated payments.
Page 78 payday lending: pieces of the picture chapter 4 35 In July 2012 GE Money said that it would 45 “Citizens Advice calls for ‘health not approve mortgages for consumers warnings’ in payday loan marketing”, 26 Care should be taken in the reading who had taken out a payday loan in Citizens Advice news release, 11 of results relating to cases featuring the past three months, or had had September 2013. allegations or suspicions of fraud in two or more payday loans in the past this analysis. In most of these cases, 46 FCA, Consumer Credit Research: year, saying that it viewed this form of the allegation of fraud was the dominant Payday Loans, Logbook Loans and Debt borrowing as ‘indicative of financial feature of the complaint, and it was less Management Services, April 2014, p. 20. stress’ (see: “GE Money refuses common for there to be subsidiary or mortgages to payday loan borrowers”, additional features to these complaints. The Guardian, 12 July 2012). A November chapter 9 This runs counter to the trend visible in 2013 survey of mortgage brokers by 47 Citizens Advice, Holding payday lenders the remaining cases sampled, where Mortgage Strategy magazine, on behalf to account: half year results from the complaints were frequently found to of the BBC’s Newsnight programme, Citizens Advice payday lending survey, blend a mix of factors. This is discussed found that two-thirds of brokers (64%) July 2013, p. 2. in greater depth in the next section. had had a borrower turned down for a And as the tables make clear, it was very 48 Department for Business, Innovation mortgage because the borrower had rare for an allegation of fraud to be a and Skills, and TNS BMRB/University of previously had a payday loan (see: subsidiary feature of other complaints: Bristol, The impact on businesses and “Principality stops lending to payday loan where it did feature, it was predominantly consumers of a cap on the total cost of users”, MoneyMarketing, 17 February as the main reason driving a complaint. credit, March 2013, pp. 28-29. 2014). The same article reported that, in February 2014, Principality Building 49 Office of Fair Trading, Payday Lending chapter 5 Society announced that it would no Compliance Review. Final Report, March 2013, p. 2. 27 Office of Fair Trading, Payday Lending longer accept consumers for a mortgage Compliance Review. Final Report, March if they had had a payday loan in the past 50 Competition Commission/TNS BMRB, 2013, p. 27. 12 months – even if it had been fully Research into the payday lending market. repaid on time. Report, January 2014, p. 113. 28 CIFAS, Fraudscape. Depicting the UK’s fraud landscape, 2014 Edition, p. 39. 36 Such a theory is supported in part by 51 Competition and Markets Authority, evidence given by Lloyds Banking Group Payday lending market investigation. 29 Office of Fair Trading, Payday Lending to the Competition and Markets Authority Provisional findings report, June 2014, p. Compliance Review. Final Report, in its recent market investigation. 6-31. March 2013, p. 27. In August 2012 The bank stated that it monitored the the OFT revoked the licence of online 52 Financial Conduct Authority, Proposals for proportion of lending to customers with a price cap on high-cost short-term credit, payday lender MCO Capital Ltd and payday loans as these customers tended imposed a fine of £544,505 for failure Consultation Paper CP14/10, July 2014, to have worse repayment behaviour than paragraph 1.8, pp. 6-7. to perform adequate identity checks customers who did not use payday loans, We look more closely at the experiences on loan applicants. representing a higher credit risk. Another 53 of vulnerable consumers in chapter 10. 30 See: “3 in 4 payday loans could have large bank told the CMA that consumers cause for complaint to the Ombudsman”, with recent payday loan borrowing had 54 Clearly, we must allow for an inevitable Citizens Advice press release, default rates up to ten times higher than margin of error in such a comparison. 5 August 2013. those customers without payday loans. Consumers are not obliged to tell the See Competition and Markets Authority, ombudsman service about their personal chapter 6 Payday lending market investigation. circumstances, and for the purposes of Provisional findings report, June 2014, our review we simply recorded instances 31 Competition and Markets Authority, paragraph 5.31, p. 5-9. where evidence of a consumer’s potential Payday lending market investigation. vulnerability – from financial hardship Provisional findings report, June 2014, to unemployment – was visible in the paragraph 5.21, p. 5-7. chapter 7 case file. It is both possible and likely 32 Competition Commission/TNS BMRB, 37 “Consumer credit countdown – Review that further consumers in our sample Research into the payday lending market. into debt collection practices of payday might have been experiencing financial Report, January 2014, p. 29. In a survey lenders starts on day one of FCA hardship, but that it simply wasn’t of 2,000 customers of high-cost short- regulation”, FCA press release, observable in the file. The proportion term credit commissioned by the FCA, 12 March 2014. of consumers considered ‘vulnerable’ 24% said they chose to apply for HCSTC 38 Ibid. for the purposes of our review might because it was their only option. The therefore be an underestimate. FCA’s research also found that 64% of chapter 8 55 “StepChange Debt Charity welcomes HCSTC customers had outstanding debt payday loan announcement”, from other types of lender, that 55% said 39 It is conceivable that even this higher StepChange press release, 13 May 2014. they used loans for everyday expenditure figure could understate the degree of (such as housing, basic living costs and consumer unhappiness with the use bills), and that 65% had no savings – of CPAs, as consumers may complain chapter 10 compared to 32% of the UK population. directly to their bank about their 56 Competition Commission/TNS BMRB, Source: Financial Conduct Authority, operation. Research into the payday lending market. Proposals for a price cap on high-cost 40 Consumer Finance Association (CFA), Report, January 2014, p. 12. short-term credit, Consultation Paper Consumer Credit Trade Association 57 Ibid., p. 29. CP14/10, July 2014, paragraph 3.13, p. (CCTA), BCCA, and Finance & Leasing 58 Competition and Markets Authority, 17. Association, Good Practice Customer Payday lending market investigation. Charter. Payday and Short-term Loans. 33 Principles for the Reporting of Arrears, Provisional findings report, June 2014, Arrangements and Defaults at Credit 41 Source: FCA, Detailed rules for the paragraph 5.21, p. 5-7. The CMA found Reference Agencies, January 2014, p. 6. FCA regime for consumer credit, Policy that some payday loan customers 34 See: “Unlocking your credit report”, Statement PS14/3, February 2014. See did have credit alternatives available Which? press release, 17 May 2014. also “Tougher rules for payday lenders to them: 18% of the customers they take effect“, FCA website, 1 July 2014. surveyed said that they could have used 42 “Continuous payment authorities: it is a credit card to borrow the money instead your right to cancel”, FCA website, 28 of a payday loan; 20% said that they June 2013, available at: www.fca.org.uk/ could have used an overdraft; and 30% news/continuous-payment-authorities. said that they could have used at least one of these two alternatives. 43 Source: UK Payments Administration Ltd. 44 Office of Fair Trading, Payday Lending Compliance Review, March 2013, p. 22.
Financial Ombudsman Service insight report Page 79 59 When a borrower is unable to meet their chapter 11 chapter 13 contractual debt repayments, they may 70 A review of 38 complaints conducted 83 See, for example, Financial Ombudsman complete an income and expenditure in August 2013 found that 50% had no Service, ombudsman news, Issue 109, assessment and offer to pay a reduced final response letter on file. Four cases April/May 2013. – and affordable – amount back each out of the 38 had a final response letter month instead. This is known as a debt 84 Consumers are also central to the FCA’s but it did not include referral rights. repayment plan. Usually, interest and approach to supervision of markets. This research has been used by the charges are frozen so that the consumer When the new regulator came into force ombudsman service’s payday loans team can repay their outstanding balance, in April 2013 it was given a mandate to work with businesses to improve the albeit over a longer term. by Government to put consumers at quality of final response letters and the the heart of what it does and to ensure 60 The Tax Incentivised Savings Association effective provision of referral rights. consumers are given a fair deal. has found that 30% of UK households 71 To support this point, our analysis found have no savings at all and that a further 85 There are some positive early signs of some evidence to suggest that more 20% have less than £1,500 to help them this. For example, the new chairman of established firms (as determined by the cope with an unexpected event or loss Wonga, Andy Haste, has commented: date of their OFT licence) had a better of income. See: TISA, The Savings and “We will become a more customer record on referral rights than newer Investments Policy Project: Our Financial focused, and inevitably in the near lenders. Future. Review summary, April 2014, p. term, a smaller less profitable business. 3. Statistics compiled by consumer group 72 The ombudsman service gives all However, we are determined to make Which? suggest this is an even bigger businesses four weeks from the date of the necessary changes and serve our problem among payday loan borrowers, the decision to pay redress and follow customers in the right way, to repair our where 55% have no savings. See: through on all other aspects of the reputation and become a business Which?, Credit Britain: Making lending decision, such as amending a consumer’s with a long-term future and an accepted work for consumers, May 2013, p. 8. credit file. place in the financial services industry.” See: “Wonga chair predicts drop in 61 Competition Commission, Payday profits ahead of business review”, Lending Market Investigation. Payday chapter 12 Money Marketing, 14 July 2014. lender pricing working paper, February 73 Mike O’Connor, StepChange chief 86 Competition and Markets Authority, 2014, p. 12. executive, has commented: “On issues Market Investigation into payday lending: 62 Research by the University of Bristol such as affordability checking, rollover Notice of possible remedies under rule 11 found that as many as 40% of online and repeat borrowing, there is an urgent of CMA Rules of Procedure, 11 June 2014, borrowers and up to 60% of high street need for more radical reform”. See p. 12. borrowers said that payday loans had “Payday loan problems up 82 percent”, trapped them into a cycle of borrowing. StepChange press release, 27 February See: Department for Business, Innovation 2014. and Skills, and TNS BMRM/University of 74 Department for Business, Innovation Bristol, The impact on businesses and and Skills, and TNS BMRM/University of consumers of a cap on the total cost of Bristol, The impact on businesses and credit, March 2013. consumers of a cap on the total cost of 63 Office of Fair Trading, Payday Lending credit, P45, March 2013. Compliance Review, March 2013, pp. 14- 75 “CFA supports Callcredit’s real time 15. reporting solution”, CFA press release, 64 By way of comparison, in the sample of 25 June 2014. cases with no evidence of vulnerability 76 Competition and Markets Authority, or hardship, 21% demonstrated good Payday lending market investigation. practice and in 17% of cases there was Provisional findings report, June 2014, evidence of bad practice. The remaining Chapter 2, p. 26. cases had no evidence either way. 77 “Wonga looks beyond payday to try out 65 See, for example, Which?, Credit Britain: longer loans”, The Guardian 26 March Making lending work for consumers, 2014. May 2013; and Citizens Advice, Holding payday lenders to account, July 2013, p. 4. 78 Competition and Markets Authority, Payday lending market investigation. 66 “Debt advisors told us that lenders Provisional findings report, June 2014, p. tended to focus on recovering the debt 4-60. rather than on negotiating an alternative repayment plan, freezing or reducing 79 Ibid., p. 209. interest and charges or suspending 80 Department for Business, Innovation collection activity.” Source: Office of Fair and Skills, and TNS BMRB/University of Trading, Payday Lending Compliance Bristol, The impact on businesses and Review, March 2013, p. 22. consumers of a cap on the total cost of credit 67 Office of Fair Trading, Payday Lending , March 2013, p. v. Compliance Review, March 2013, p. 15. 81 Source: Competition and Markets Payday lending market 68 “Dealing with debt stress”, StepChange Authority, website: www.stepchange.org/ investigation. Provisional findings report, Howwecanhelpyou/Debtadvice/ June 2014, p. 6-35. Dealingwithdebtstress.aspx. 82 6 April to 21 July 2014. 69 “The Relationship between personal debt and mental health: a systematic review”, Mental Health Review Journal, Vol. 15, Iss 4. See also: Royal College of Psychiatrists/Rethink, Debt and mental health. What do we know, what should we do?, 2011, Abstract, p. 3.
Page 80 payday lending: pieces of the picture
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