It’s now a few weeks since Wonga went into administration. This seems like a good point to ask some difficult questions about the lessons from Wonga and what should be done to reduce consumer harm in future.
Much of the media coverage has gone as follows:
Wonga was the worst – then the FCA fined them and made them write off debts in 2014 and introduced good payday loan regulation in 2015. Wonga has now gone under because of refunds resulting from their old sins – and anyway it’s partly the fault of the nasty claims companies.
A comforting narrative – but wrong in many respects
That suits the FCA, who are praised for their 2014/15 actions. The implication that current payday lending is now much-improved suits the lenders. It suits the big debt advice charities, who campaigned for better regulation before 2015 but have largely ignored payday loans once that was achieved.
But there are big problems with this version of events.
What about the other payday lenders?
Wonga may have been the largest but it wasn’t the worst before 2015 (though it did deserve a special award for its fake lawyers’ letters). The focus on Wonga obscures the issue of redress for the victims of other payday lenders’ irresponsible lending.
In 2014 I suggested that the FCA’s huge fines and agreed redress program with Wonga had been done in the spirit of Voltaire, who said that the English shoot an admiral from time to time to encourage the others… It isn’t clear that this is a good approach to regulation.
Post-2015 lending is still too often irresponsible
The limits on rollovers and the use of CPAs, the price cap etc have reduced the worst excesses of pre 2015 lending, and the reduction in the market size itself reduces the amount of consumer harm. However, there are still significant numbers of unaffordable payday loans being given, by Wonga and by other lenders.
Claims companies go after areas where large numbers of people have good cases
Claims companies would not have descended on this area if there were not a large number of people with excellent complaints to be made. The fact that claims companies charge excessive fees and often do a very poor job with these complaints is not relevant. If the payday lenders and the FCA had done a better job of ensuring customers got redress, there would have been no money for claims companies to make.
Policy questions for the regulator and other bodies
FCA – how should the DISP rules be effectively enforced?
The FCA’s DISP rules that are of particular relevance to payday loan affordability complaints say that a lender should:
- explain decisions to customers in a clear way which is not misleading;
- aim to minimise the number of complaints referred to the Ombudsman;
- analyse patterns in Ombudsman decisions and use these to improve the firm’s internal complaint handling;
- consider a redress exercise, including contact customers who have not complained.
These rules are being routinely ignored by many payday lenders.
I went into details about the problems with lender complaints handling after the FCA’s Dear CEO letter a year ago, see: Dear CEO – how to improve payday loan complaints handling. Since then, the only area which has significantly improved has been the provision of loan details to customers as a consequence of GDPR.
Many large lenders still have very high uphold rates at the Ombudsman – they are not learning the lessons from Ombudsman decisions and applying them to their own complaints handling.
The FCA needs to take immediate action to make firms comply fully and promptly with DISP.
FCA – how can pre-contract affordability checks be improved?
With an effective application of the DISP rules, it is possible in theory that firms would use complaints and the Ombudsman’s comments to improve their affordability checks before lending. But this is a slow approach, requiring consumer harm, then sufficient consumers being aware enough to complain, then the firm taking action.
So far there is little sign of this working. Take this Ombudsman decision, where the lender (it was Lending Stream but it could have been many other payday lenders) gave ten instalment loans in nine months and said it didn’t have to ask to see a customer’s bank statements. The Ombudsman said:
I think, by now [when the fifth loan was applied for] it would’ve been proportionate for Lending Stream to build a full picture of Mr D’s circumstances, before agreeing to lend again – which would’ve included verifying the information he had provided.
I understand the FCA’s reluctance to mandate in detail what checks a firm should perform, but it seems to me that there is a greater detriment by being too vague.
FCA, Insolvency Service, government – how can redress be provided after insolvency?
Wonga’s administrators are warning that it is highly unlikely that people will get paid the full amount of any agreed refund. And the more customers who complain, the lower the payout is likely to be.
There would seem to be three ways to resolve this for future failures:
- the government agrees to fund the redress;
- the FSCS scheme is extended to cover consumer credit
- the Insolvency Act is amended eg by making to consumers with redress preferential creditors.
None of those is easy. But it is completely unsatisfactory that consumers who have borrowed from regulated firms should not get the redress they are entitled to because of previous regulatory failures.
FCA – how should claims companies be effectively regulated?
Current Claims Company regulation is so light touch as to be nearly invisible. Claims companies are doing a very poor job of checking a consumer has a valid affordability complaint before sending it to a lender, or assessing the reply from the lender and of deciding whether to send the case to the Ombudsman. As a result consumers with poor cases are being misled about the chance of getting a refund and consumers with good cases have them resolved more slowly as lenders and the Ombudsman are trying to cope with large number of very poor complaints.
The FCA is taking over as the regulator from April 2019, so this is the chance to improve it. Dramatically.
FOS – how can complaint handling be speeded up?
Complaints against payday lenders have got painfully slow for some customers. Customers with payday loan affordability complaints are often not in good financial positions. Some of them are so desperate as to feel they have to accept a poor offer from a lender rather than have a lengthy complaint procedure at the FOS. Justice delayed is justice denied for these consumers.
The main ways to improve this are for the payday lenders to make better offers and so settle more complaints directly – the current uphold rates show this is not happening – and for the claims companies to be discouraged/banned from sending so many very poor complaints.
But the FOS hasn’t helped things by its unreasonably protracted decision-making process for loans over 6 years old. There are thought to be several thousand people waiting for jurisdiction decisions on these complains, some of which have been on hold for more than two years. I know the arguments are complex, but I am not aware that any new arguments have been advanced since the start of the year by the lenders – it’s time for the FOS to actually make a decision.
UPDATE I am pleased to say the FOS has now published two jurisdiction decisions, both deciding that can look at these older loans as the customer only realised they could complain in the last three years. See Ombudsman decisions on payday loans over 6 years old.
The FOS should also look at incentivising firms to handle complaints with FOS in a more speedy fashion. Lenders could be fined for failing to provide a case file within a couple of weeks and for failing to respond to an adjudicator’s decision within a couple of weeks. And consideration should be given to adding on an additional fee for a case where the lender asks for a decision by an ombudsman and the ombudsman upholds the adjudicator’s decision. Take the Lending Stream case linked to above – the decision by the adjudicator looks to me to have been standard and in line with dozens of other decisions Lending Stream would have seen – so why did they add a delay of several months by asking for it to go to an ombudsman?
MAS, Citizens Advice, debt management firms – information needs to be provided about affordability complaints
Only National Debtline has provided any useful information about payday loan refunds. StepChange and Payplan recommend that people should try to reclaim PPI but are silent about payday loan refunds. Both the Money Advice Service and Citizens Advice websites fail to explain that a lender may have to refund interest for previous unaffordable loans. They both provide templates for complaints that focus on asking for a payment arrangement for an existing loan, not for the interest to be removed from that loan.
Not just a payday loan issue
Many of these issues don’t only apply to payday loans. All forms of credit have the potential for affordability complaints but these are more likely for high-cost credit, such as doorstep lending, rent to own, guarantor loans, logbook loans and the bad credit, large loan providers. And also to credit limit increases for running credit.
There is an opportunity here to try to prevent Wonga-style problems in the future. The Centre for Responsible Credit has called for a Treasury Committee enquiry into Wonga and that seems to me to be a good way to take forward the wide range of different issues to be considered.
If action had been taken on some of them earlier, it may only have hastened the Wonga collapse, but that would have meant that fewer customers would have been involved.