Recently the payday lender Wonga was forced into administration blaming a surge in historical compensation claims as the reason for its collapse. These claims suggested that lenders had never properly checked their customers could afford to pay the loans back.
Stevens listed some of the concerns held by the credit industry.
A “reverse burden of proof” during claims that meant firms must prove to the ombudsman that they carried out suitable affordability checks with old loans, rather than consumers proving that checks did not take place. Cases that go to the ombudsman cost lenders £550 irrespective of the outcome, even though the average short-term loan was usually less than that.
Banks offering overdrafts did not face the same rules on affordability that credit companies did with loans.
The financial ombudsman was allowing claims linked to loans that were too far in the past, and should have been timed out.
Claims management companies were trying to dodge regulation by city watchdog, the Financial Conduct Authority (FCA) by claiming they were under the same jurisdiction as solicitors.
“Flood of claims.”
He argued that CMCs were also sending out a flood of claims before regulation under the City watchdog took effect next year.
But he admitted there was little that firms could do in the meantime to protect themselves from these claims and that they would “never get sympathy”.
However, former chairman of the CMC’s trade body, the Professional Financial Claims Association denied the claims saying: –
“The way to eliminate CMCs and claims is to treat consumers fairly, and get the sale right in the first place.”
He argued that credit firms were responsible for their own lending practices.
“Claims were often complicated and required research, so it would be difficult to drop them all on a company at once.”
He added that it “would be hard for a CMC to avoid regulation by pretending to be something else.”
What the Financial Ombudsman Service said: –
According to the FOS, The Financial Ombudsman Service, each case was considered on its merits. There was guidance on when a claim would be regarded as too old to be considered. In general, a consumer can make a claim for compensation up to six years after the loan was sold.
However, they can also make a claim regarding a more historic loan, up to three years after they knew, or could reasonably have known, that they had good reason to make the complaint.
Credit Firms, however, say the FOS is leaning too much in favour of claimants when allowing claims, when companies no longer have the documentation from such a long time ago.
Others argue that there is no excuse for failing to keep the records for longer.
The FCA profiles typical payday borrower.
The Financial Conduct Authority (FCA) ran a survey entitled ‘Financial Lives’ . The survey revealed that 3.6 million people (7% of UK adults) are borrowing from friends and family. That is more than the 3.1 million (6% of UK adults) who took out high-cost credit such as payday loans.
The FCA also laid out a typical profile for consumers borrowing from payday lenders. This showed the average age of a payday borrower was 35 with 62% being male and 38% female. There average income was below the national average of £26,370 at £20,400. 76% had no savings and the average for the remaining borrowers was just £177 worth of saving. 68% struggled to pay bills and had an average household debt, excluding mortgages, of £4,700.
Bank of England figures suggest slow growth in borrowing.
The Bank of England’s figures show that borrowing, in July, has seen its lowest annual growth since an 8% increase in August 2015.
Borrowing from sources such as credit cards, personal loans and overdrafts increased by 8.1% annually in August, down from 8.5% growth in July. However, within the 8.1% annual growth in consumer credit in the latest figures, growth in personal loans and overdrafts was at its weakest since December 2014. Growth in credit card borrowing has remained “broadly stable” for the past 18 months.
The bank say the figures show signs of increased caution for households. The August hike in interest rates has seen annual growth in consumer credit weakened to its lowest levels in three years.
Annual growth in consumer credit is now “well below” a peak of 10.9% seen in November 2016.
Conditions for borrowers getting tougher.
Recent figures, however, suggest conditions for borrowers are getting tougher.
The number of balance transfer credit card deals on the market which have an introductory zero-interest period has fallen to its lowest level for years.
This could make life harder for credit card borrowers who rely on shifting their debt from one interest-free credit card deal to another.
The findings could spell higher costs for people in persistent debt. They may be used to jumping from one 0% deal to another when their initial interest-free period ends.
Interest-free balance transfers are a way to make the cost of debts cheaper. They allow people to move old debts to a new card, with 0% interest for a set period. This helps to keep the cost of the debt down. Although any fees for transferring the balance need to be weighed up.
Borrowers should also aim to clear their balance before the 0% initial period ends – after which time the cost of the debt could rocket.
Debt Charity say consumer confidence slipping.
One Debt Charity, said: –
“With consumer confidence slipping over the summer against a backdrop of uncertainty caused by Brexit, it’s perhaps not surprising that credit growth has continued its downward trend.”
“We must keep an eye out for issues arising out of emergency borrowing to ensure lending remains affordable and sustainable in the long term.”
Credit card market adapting to economic pressures.
According to one finance expert at Moneyfacts.co.uk: –
“It’s clear to see that the credit card market is adapting to economic pressures and growing scrutiny regarding consumers with persistent debts.”
“Credit card providers have diluted their enthusiasm to offer table-topping interest-free balance transfer offers over the last few months. Resulting in the number of deals with this feature falling to a record low of 87, down from 101 in June.”
“If lenders continue to tighten their interest-free offers, the cost of persistent debt will only escalate further. This could result in customers paying out more in balance transfer fees, time and time again.”
“These fees are on the rise, up from 2.04% on average in January to 2.2% today.”