The Financial Ombudsman (FOS) has recently published two important decisions about guarantor loans, one where a borrower complained and one where the guarantor complained.
I have covered the borrower case here: Ombudsman – Amigo did not check properly that a borrower could afford the loan.
This article looks at the FOS decision about the guarantor for a loan. I have selected points from the decision which may be useful for other people wanting to make a complaint that they should never have been accepted as the guarantor. I have used italics for quotes from the decision, the rest is my paraphrasing.
The Ombudsman found:
- Amigo had not checked properly that Miss W could afford the loan and that better checks would have shown that she couldn’t;
- the loan had not been correctly described to her before she agreed to it;
- Amigo had treated Miss W poorly when trying collect money from her, not taking account of her mental health problems.
So the Ombudsman ordered that:
- Miss W should be removed as the guarantor;
- any payments she had made should be refunded; and
- she should be given £500 compensation.
The Ombudsman’s 4 key questions
In a normal affordability complaint, FOS looks at whether the lender made sure the borrower could afford the loan and, if the lender didn’t check properly, what thorough checks would have shown.
But the position of a guarantor is more complicated. So the Ombudsman said he intended to look at four questions:
- did Amigo complete reasonable checks that the borrower could repay the loan in a sustainable way? if not, would better checks have shown that the borrower could afford the loan?
- did Amigo obtain Miss W’s properly informed consent before setting up the loan with her as the guarantor?
- did Amigo complete reasonable checks that Miss W could repay the loan if the borrower did not? if not, would better checks have shown that Miss W could afford this?
- did Amigo act unfairly in some other way?
1. Could the borrower afford the loan?
If the loan was not affordable for the borrower, the lender should never have made the loan at all.
In Miss W’s case, this was difficult to assess, as the Ombudsman said:
as the borrower wasn’t a party to this complaint, I didn’t have any evidence of the checks that Amigo carried out, or the depth that they went into, before it agreed to lend to the borrower. But the lack of information from both Amigo and the borrower on this matter didn’t lessen the problem, as Amigo was seeking to enforce the guarantee and indemnity agreement. And Miss W says she should never have been accepted as a guarantor in the first place.
The Ombudsman pointed out that the borrower had made very few payments and Amigo was seeking to enforce the guarantee:
both of these factors were indications that the monthly loan payments may have been unaffordable for the borrower in the first place.
Amigo replied that the borrower had called to say there had been a significant change in his circumstances.
The Ombudsman decided he didn’t have to make a decision on this point as he was going to uphold Miss W’s complaint for other reasons.
But it seems to me that arguing the loan was unaffordable for the borrower could be a good approach for guarantors who are themselves able to afford the loan repayments.
2. Was the loan explained properly?
Guarantor loans are unusual contracts. They are a long term commitment to potentially pay a lot of money where the guarantor derives no benefit from the loan at all. So they need to be clearly explained to the guarantor.
The Ombudsman said:
the rules and regulations in place at the time Amigo sought to bind Miss W to the guarantee and indemnity agreement required it to obtain her properly informed consent before doing so. And it had to do this by getting Miss W’s agreement to the guarantee after having provided her with an adequate explanation of the circumstances in which the guarantee and/or indemnity might be called upon and what the implications of the guarantee being called upon would be.
How large was the loan?
There was a major problem with the phone call between Amigo and Miss W that may not often apply in other cases.
The borrower originally had a different guarantor, then wanted a top-up and the original guarantor refused. Miss W became the guarantor for the new loan of £5,750, most of which settled the previous loan, with only £1,039 being paid to the borrower as the top-up.
But in the phone call with Miss W, the Ombudsman found there was no reference to the total loan amount, only to the top-up amount.
Amigo argued that the Terms of the Agreement were clear and Miss W had confirmed that she had read, understood and accepted them. The Ombudsman didn’t think this was sufficient:
it seemed to me that the purpose of the pre-payout call was to obtain Miss W’s informed consent to being the guarantor on this loan… I didn’t see how Amigo could fairly and reasonably seek to correct an omission in the information it provided on the call with information it provided through another medium. Equally I didn’t think it was fair and reasonable to expect Miss W to have picked out the relevant parts of different communications and piece them together to get an idea of her obligations, when it was Amigo’s responsibility to provide an adequate explanation of them.
Were the implications of a guarantor loan adequately explained?
The Ombudsman mentioned other problems with the way Amigo had explained the guarantor loan to Miss W.
Miss W had been asked if she had read the Terms of Agreement and if she was the person who had signed online agreeing to be the guarantor. But the Ombudsman pointed out Miss W had not been asked if she understood the terms.
The Ombudsman also said that in the phone call:
- there was no explanation of a guarantor only having to pay if a Default Notice had been issued to the borrower;
- although there was a reference to charging orders and attachment of earnings, these terms were not explained; and
- there had only been a suggestion that Miss W should seek advice from Citizens Advice, not from a legal professional.
Overall the Ombudsman concluded:
bearing in mind the potential implications Amigo itself foresaw, the seriousness of them and its failure to fairly and reasonably use what I considered to be plain and intelligible language, I didn’t think that Amigo provided an adequate explanation about the circumstances in which the guarantee might be called on and what the implications of this might be to Miss W.
I don’t know if this on its own would have been sufficient for Miss W to win her complaint. There was so much else wrong in her case! But I think some of these points could be helpful to other people making complaints, especially if their phone call with the lender was brief, hurried, or they had showed any signs of not really understanding their own finances, which would suggest they may not understand the details of a guarantor loan.
3. Could Miss W afford to repay the loan?
The Ombudsman said that:
Amigo had to reasonably conclude that making the payments to the loan, in the event she had to, wouldn’t cause Miss W undue difficulty or adverse consequences. In other words, it wasn’t enough for Amigo to simply think about the likelihood of it getting its money back, it had to consider the impact of loan repayments on Miss W.
And he outlined the standard FOS approach to looking at what a reasonable check is, saying it has to be more thorough the lower a customer’s income is, the higher the amount to be repaid, the longer the term of the loan and the larger the number of loans the lender had previously given the customer.
The Ombudsman said:
I thought that Amigo simply accepted the information provided [in the questionnaire by Miss W] without question and without any attempt to scrutinise or evaluate it. I thought this was the case because Miss W was recorded as having a monthly income of £3000 even though she was also recorded as having been employed as a Senior Healthcare Assistant.
I didn’t think that it was impossible for Miss W to have had a monthly income of this amount in the job she had. But given the declared income was substantially above the average for an individual in this line of work, I thought that it would have been reasonable and proportionate for Amigo to have taken steps to have verified the monthly income it was provided with in this case.
I also explained that I thought it would still be sensible and proportionate to verify, at least, employment status and income irrespective of whether the declared figure was wholly out of kilter.
There didn’t appear to have been any scrutiny of the rest of the information included on the questionnaire either. For example, I hadn’t seen anything to suggest that Miss W’s rent declaration was verified. And I was also concerned at the fact that Miss W didn’t appear to have been asked about her existing monthly credit commitments either.
Amigo said it was entitled to rely on the information Miss W provided within the questionnaire and that there was no rule dictating that a creditor must request proof of income or expenses before paying out a loan, quoting an FCA document saying “the lender must make a reasonable assessment in the individual case but we do not dictate how this must be done”. And that it completed a number of checks on the income and expenditure assessment to ensure the figures provided were realistic, eg by comparing expenses to the national average.
But the Ombudsman went into detail about when less and more detailed checks are likely to be needed, concluding that:
I want to be clear in saying that given the particular circumstances in this case – the term of the loan, the total charge for the credit and Amigo seeing charging and/or attachment of earnings orders as a reasonably foreseeable consequence of Miss W not meeting her obligations – I think that it would have been fair, reasonable and proportionate to ascertain Miss W’s actual financial position before accepting that she could make the payments in the event she had to.
He also pointed out the Amigo’s own website says a guarantor has to have a good credit record if they are not a homeowner, but she had a default and was only making minimum payments to her credit card:
it seems to me that Miss W didn’t meet Amigo’s own stated criteria for being a guarantor. And, in these circumstances, I can’t see how it was fair, reasonable or proportionate to accept her as a guarantor without asking her to provide evidence of her income and expenditure, rather than outsourcing this to a CRA.
The Ombudsman then looked at what proper checks would have found:
- Miss W’s income was erratic and substantially less than she had put on the questionnaire;
- she had nowhere near enough income to be able to make the payments for this loan for one month, after taking her actual expenses and credit repayments into account.
4. Was there any other unfair treatment?
The Ombudsman found that Miss W was likely to have been suffering from a mental health condition for several years, including at the time she agreed to be the guarantor for the loan.
He didn’t think there was anything in the phone call with Amigo before the loan was approved that would have alerted Amigo to Mis W’s mental health problem, so this wasn’t relevant to the whether Amigo made a fair decision to accept her as a guarantor.
But the Ombudsman did think her mental health was relevant to Amigo’s debt collection process, by which time Miss W had told Amigo about it in her complaint.
Amigo said it had asked Miss W to complete a DMHEF form – which gives evidence from her doctor or another medical professional about her mental health – but she hadn’t done this. And it just followed its normal procedures in referring her to its pre-litigation team.
The Ombudsman pointed out Amigo had seen other medical evidence about Miss W’s health and this meant it was unfair to utilise its standard prelitigation procedure and threaten court action.
So the answers to the 4 key questions were…
- did Amigo complete reasonable checks that the borrower would be able to repay this loan in a sustainable way? not determined
if not, would better checks have shown the borrower could afford the loan? not determined
- did Amigo obtain Miss W’s properly informed consent before setting her up as the guarantor? NO
- did Amigo complete reasonable checks that Miss W could repay the loan in the event the borrower did not? NO
if not, would better checks have shown that Miss W would have been able to do so? NO
- did Amigo act unfairly in some other way? YES – Amigo did not take into account her mental health problems during debt collection.
Because of (2) and (3), Miss W was removed as guarantor and any payments she had made to the loan had to be refunded.
It is worth pointing out that Miss W would have won her complaint and been removed as guarantor if either the answer to (2) had been NO or the answers to (3) had been NO and NO.
Because of (4), she was awarded compensation of £500.
How to complain about a guarantor loan from any lender
If reading this has made you think that you should not have been accepted as a guarantor or have been given a loan if you were the borrower, there are two pages which can help:
- for guarantors: How to complain when you are the guarantor for a loan
- for borrowers: How to complain if you have got a guarantor loan and you are the borrower.