In the last six weeks, Britain’s largest payday lender, QuickQuid, went into administration followed by three smaller lenders: 247 Moneybox, PiggyBank and Swift Sterling.
Have the lessons from Wonga’s collapse last year been leaned? And how can regulators and debt advisers do better in future to protect borrowers, not just of payday loans but other sorts of high cost credit as well?
My 6 suggested lessons after Wonga
Last year I wrote: Lessons to be learned from Wonga. There I identified the following six points as areas where improvement is needed:
- FCA to enforce DISP rules. Too many DISP rules were being ignored – decisions not clearly explained – firms not applying the FOS approach to improve their decisions – mass redress exercises not being undertaken.
- FCA to improve pre-contract affordability checks. Relying on affordability complaints to force changes in lending policies is a slow approach, requiring consumer harm. I suggested that the FCA should set out in more detail what checks a firm should perform, as there is a greater detriment by being too vague than being too specific.
- FCA (or another government agency) to provide full redress after insolvency through changing the FSCS or some other means.
- FCA to introduce effective regulation of claims companies when it becomes the regulator in 2019.
- FOS to speed up complaint handling. Some customers were desperate and accepted a poor offer from a lender rather than have a lengthy complaint procedure at the FOS.
- Debt advisers to provide information about affordability complaints.
What has happened in the last year?
I suspect Wonga feels like a very long time ago to FOS, the FCA and many payday lenders. Here are the main areas where developments have changed the landscape for high-cost credit regulation in the last year.
FCA has continued to emphasise affordability
On October 2018, the FCA wrote a letter to payday lender CEOs headed Affordability of High Cost Short Term (HCST) loans. This highlighted many of the deficiencies in lenders’ complaint handling.
Then in March 2019, the FCA wrote to all CEOs of high cost credit firms, including payday lenders, guarantor lenders, high cost subprime lenders, home collected credit and rent-to-buy firms, putting affordability checks, relending and complaint handling at the top of the FCA’s supervision priorities.
At least two lenders – PiggyBank and CreditStar – were told by the FCA they had to stop lending in the summer while a review was carried out of their creditworthiness assessments. PiggyBank later resumed lending – only to go into administration this week. CreditStar, a very small lender, has not restarted lending.
The massive scale of unaffordable lending became clear
Until recently, only the lenders have really known how many customers were given unaffordable loans. But in 2019 the true scale has been revealed.
Wageday Advance, a mid-sized lender, developed a program to replicate FOS decisions in 2018. The figures from it were so bad that the company went into administration in February 2019. And the numbers became public:
The company built a claims calculator, which has estimated that current and former customers could be entitled to up to £223m in compensation, including interest. An estimated 330,000 people [out of a total of 800,000 customers] are expected still to have eligible claims for compensation. Successful claims made last year had an average payout of £850.
The Wageday Advance administrators have received about 100,000 successful claims and are expecting these people will get paid between 4.7 and 5.2% of the calculated refund.
Wonga was a much larger lender, so the number of Wonga customers who suffered from unaffordable loans was always likely to significantly more.
The Wonga administrators said that at the end of August 2019 they had received c. 390,000 successful claims for refunds, with a total value of c. £460million, roughly £1,200 a claim. The deadline for claims was a month later, so the final figures will be more.
In 2014 I asked if a million people should get payday loan refunds. It now seems likely that I was right.
FOS won the argument about complaints over six years
Wonga went into administration soon after being told that FOS had decided not to time-bar complaints about loans taken more than six years previously. At that point, QuickQuid and other lenders were still disputing FOS’s decision.
Since then it has become clear that FOS has won this argument:
- FOS published two lead decisions, see Ombudsman decides it can look at payday loans over 6 years old for details;
- the Wageday Advance administrators said they would include loans over 6 years in their refund calculations;
- the Wonga Administrators made the same decision. Their reasons are set out in detail here, including that the FCA was strongly in favour of older loans being included in refunds;
- in summer 2019 QuickQuid stopped arguing and started paying out on some older loan cases;
- ICL’s Scheme of Arrangement now includes loans over 6 years;
- similar FOS decisions to not time-bar older claims are being made in other high-cost credit sectors such as rent to buy, home-collected credit and guarantor loans.
FOS is using standardised language about affordability
FOS issued two lead decisions on long chains of payday loans in September 2018. They both reached similar decisions bout when a lender should have realised the loans may be unaffordable. Here is what one said:
I’ve thought about the first few loans taken by Miss H to try to identify whether and when there are indications that the lending had become (or was becoming unsustainable). Examples of the kind of indicators that I think are particularly important here include:
- the number of times that Lender A had lent to Miss H in total
- the time period over which it had provided those loans
- the amounts that Lender A was lending to Miss H, including any general trends
- the time between Miss H repaying one loan and Lender A providing the next.
After these lead decisions, similar wording started to be used in other FOS payday loan decisions. A more general wording was then developed that also applies to other high cost credit markets. Here is a lead decision about a guarantor loan, saying that additional checks should be made:
- the lower the borrower income;
- the larger the loan;
- the longer the term of the loan; and
- the more previous borrowing from the same lender.
There is nothing new here – it’s the approach FOS has been taking from 2015. Four years ago I was telling readers that their cases were stronger the more loans they had, if their loans were getting larger and if the gaps between the loans were small.
But the way FOS is now using the same language across thousands of decisions and a broad range of complaints emphasises how it is making its decisions.
FCA rejected the idea of extending the FSCS
In January the Treasury Select Committee asked the FCA why high cost short term lending (ie payday loans) hadn’t been included in the FSCS, whether the FCA now intended to consult about this and if not, how they would ensure that customers were not disadvantages when a payday lender goes into administration.
The FCA responded giving three reasons why it didn’t think payday lending should be included in the FSCS:
- customer losses from all forms of consumer lending are not likely to happen often or be large. Although the FCA acknowledges that for some payday loan borrowers may be vulnerable and even a small loss may be significant.
- FCA actions such as the price cap have reduced the likely losses to consumers.
- FSCS cover could only be provided by a cross-subsidy from other non payday lending firms.
How does this measure up against the aims I suggested last year?
There has been good progress in some areas, but no or negative progress in others.
Complaint handling at FOS is now faster
Complaints now seem to be going through a lot faster and backlogs are being unwound. My guess is that this has resulted from three factors:
- more staff have been trained. The dramatic increase in complaints on 2018 left FOS struggling to keep up, but perhaps now they are staffed for the “new normal” level of affordability complaints;
- more lead decisions and more standardised language has probably made the decision processes more streamlined;
- the largest firms have now all gone bust, removing more than ten thousand complaints from the backlogs. This is hardly the way anyone would have chosen to speed up FOS decisions, but it is a beneficial side effect.
Individual borrowers with a FOS complaint that ended when the lender went under have an understandable grievance that if FOS had been faster, they would have received their correct redress.
But if FOS could somehow have forced through all QuickQuid complaints to a legally binding final decision in January this year, it seems likely QuickQuid would have immediately gone into administration and the claims would still not have been paid.
FOS delays are not the cause of the borrowers’ losses. For that, you have to look to the magnitude of the unaffordable lending (which first the OFT then the FCA did not prevent), by the low capitalisation of the lenders (which the FCA has allowed to continue) and by the lack of a compensation scheme such as the FSCS (which the FCA doesn’t think is important).
Claim companies – regulation is more effective
In April 2019 the FCA became responsible for authorising claims management firms. The new rule book is a massive improvement and some of the worst cowboys have left the market.
It’s work in progress, and in particular I think the FCA should be looking at capping charges on affordability complaints, which are just as standard as PPI reclaims were. 30% is an unreasonable amount to pay someone for sending off a standard email.
No progress from the debt charities
Not much seems to have happened at all.
Citizens Advice has a template letter if a payday loan is unaffordable – but bizarrely it doesn’t ask for a refund for previous repaid loans or for interest to be removed from the current one, it just asks the lender for a payment arrangement. The Citizens Advice page on home collected credit makes no mention of possible affordability complaints and suggests you complain to the CCA. There is no page at all about guarantor loans. If you go to your local Citizens Advice you can get a lot of help with a guarantor loan complaint, but people can’t guess this is available from the Citizens Advice website.
StepChange has pages on payday loans, doorstep loans, guarantor loans – none of which mention affordability complaints.
National Debtline has a good factsheet on payday loans and does mention affordability complaints. But nothing on guarantor loans or home collected credit.
Mis-selling of unaffordable loans is not a minor problem that happened to a few people before the payday loan cap was brought in. It has happened to more than a million people, many vulnerable, and is still carrying on in 2019.
This is very disappointing. We are supposed to be debt advisers, not debt collectors…
FSCS protection ruled out
Now the true scale of the number of people affected has become clear, I don’t think the FCA could reasonably write now what it said to the Treasury Committee in February:
“it is our view that consumer credit activities… are unlikely to give rise to financial losses for consumers either (i) often or (ii) of significant amounts.”
If the losses were to be small, then there would seem to be little problem in covering them within the FSCS. If they are going to be large, then the FCA can’t leave this group of consumers, who it admits may be vulnerable, without adequate protection.
The FCA needs to reconsider its rejection of extending the FSCS to cover consumer credit. The Treasury Committee should reopen this topic.
FCA supervision – is it adequate?
Supervision of authorised firms takes place in private, so it’s difficult to know what the FCA is checking up on or saying. But in a couple of areas what is visible doesn’t seem promising.
I think some lenders are still in denial about the scale of their problem with affordability complaints. The Wonga directors had recorded a total of £45million in the Statement of Affairs they gave to the administrators as the provision for these refunds. That has turned out to be less than 10% of the figure for the people who submitted a claim that was found to be valid.
In May I suggested in Payday lenders tired of having to pay so many refunds that even though payday lenders were complaining about the quality of FOS decisions, they were actually consistent and the lenders’ real problem is they don’t like the decisions, not that they are unclear or the goalposts are being moved.
It is very hard to see how lenders such as Sunny can still be saying they are “unclear” in October.
If a firm develops a program to mimic FOS decisions on their current and historic lending database, they might have to show the results to their board, their accountants and the FCA… so pretending you are unclear about what is happening may be more convenient… The FCA should be insisting that every high cost lender performs these checks.
The FCA should also be insisting that lenders start adopting the FOS approach to determining all complaints. Here are a couple of comments from the last two weeks :
I have just received my decision from Sunny (3 days before 8 week deadline). They have rejected my complaint, but ‘as a gesture of goodwill’ have agreed to write off the remaining balance of approx £570 on my account. (I have had 49 loans from them
Just been turned down for a refund from lending stream even though I had taken 33 loans in total from them with at least three maybe four running concurrent each month and then having to borrow again the following month. They came back with the loans were all affordable and would not be refunding. Does anyone think I should take to ombudsman?
Sunny and Lending Stream know perfectly well these customers are going to win a FOS complaint. This is unacceptable complaints handling and the FCA should be saying so.
These lenders should be made to review all open cases at FOS and also all complaints they rejected that have not been taken to FOS – some vulnerable customers may have believed the rejection they were sent and not felt they had a strong enough case to go to FOS.
A lot of work still to be done!
Overall my verdict is that it is a mixed bag. There is a lot still to be done by lenders, regulators and debt advisers. And I hope the lessons from payday loan affordability complaints can be learned more rapidly in other high cost credit sectors.