According to the Financial Ombudsman Service (FOS), there has been an unprecedented rise in the number of complaints about credit cards and irresponsible lending. Here I explain what the main problems are and how you might have been affected.
If a business is going to lend you money, they have a responsibility to act in your best interest. This includes making sure that you understand what you are signing up to but also that you can afford the loan.
Unfortunately we have seen a number of occasions where that has not happened, from the mis-selling of PPI, payday lending and 125% home loans.
But what makes lending irresponsible or unaffordable? And what checks should lenders be carrying out to make sure that we can afford the credit we’re being given?
In this article, I cover:
Unaffordable lending is when a business gives a loan to someone who cannot afford to repay it. The loan may be more than you could possibly pay back or bigger than you needed.
A responsible lender should carry out checks first that you can afford it. This means that you:
If you think that you have been lent money irresponsibly and you are suffering financial hardship, you can complain to the creditor.
Irresponsible lending can happen across a range of financial products, such as payday lending and car finance. But credit cards are where we are seeing a significant increase in complaints about irresponsible lending.
And it is on the rise.
Credit cards are now the second most complained-about financial product (after current accounts). During the last three months of 2023, there were 5,660 complaints registered to the ombudsman – an increase of 76% on the same period a year before.
Those figures are eyebrow-raising in themselves. But what really grabbed my attention was the fact that more than half of those complaints were about credit that was lent “inappropriately”.
That is a huge three and a half times more than the previous year!
Undoubtedly, irresponsible lending has been taking place. But there is another reason why we are witnessing such a large rise in complaints about it at the moment.
Approximately three-quarters of the irresponsible credit card lending complaints were brought by “professional representatives”, otherwise known as claims management companies (CMCs), according to the ombudsman. This compares with just a quarter the previous year.
Professional representatives generally mean CMCs, although you can ask any third-party, including a friend or colleague, to make a complaint on your behalf.
During the PPI mis-selling scandal, the number of these businesses ballooned. They offered to help make complaints on your behalf, to take the pressure off you and the confusing world of PPI compensation.
Except they didn’t.
The companies just made you fill in exactly the same complaint questionnaire that the ombudsman asked everyone to fill in. Their payment was then anything up to 40% of your compensation. In other words, they got paid for doing nothing.
Eventually, the PPI gravy train ground to a halt when the FCA introduced a deadline for making complaints. As a result, many CMCs went under, while the remainder began to look for new mis-selling scandals.
The focus now has turned to irresponsible lending.
Of the 7,500 complaints about unaffordable lending last year, across a range of financial products, 70% were made by CMCs, according to the ombudsman.
But only 14% of CMC cases were upheld, compared to 44% of cases brought by individuals.
According to Viv Kelly, the ombudsman’s director for consumer credit, many of the CMC cases are poorly evidenced.
“In these instances, uphold rates can be considerably lower than if a consumer brings a complaint directly to our service.
“Consumers don’t need to use a professional representative to bring a complaint to our service. People can come directly to our free, independent service and we’ll see if we can help resolve their complaint,” added Kelly.
Often the claims managers efforts are “cut and paste” jobs, which fail to address their customer’s individual experiences. This is the key to a complaint being upheld.
So the moral is, don’t use a claims manager if you’ve got a lending complaint; make it yourself.
Each lender must assess if you can afford the amount they are lending you. The higher the sum, the more checks the lender must make and the rules tend to get stricter too. So you’ll have to jump through more hoops to get a mortgage compared to a personal loan, for example.
The regulator, the Financial Conduct Authority (FCA), has a number of rules concerning lending, depending on the financial product. Once these have been followed, the lender can then decide who they want to lend to.
This makes sense, because if there was a one-size-fits-all approach to lending and you get turned down by one business, you’ll get turned down by the lot. Lenders are businesses, which means they can make pragmatic decisions about the risk they are willing to take when they lend money or offer credit.
Ultimately, it doesn’t make good business sense to lend money to people that can’t pay it back – though that certainly has happened a great deal over the years.
Financial businesses make a calculated risk that the money they lend to you is something that you can afford to pay back over time. Some forms of lending – such as credit cards – are long-term arrangements that will change significantly over time, with limits going up and down.
But our own lives will change over time too, as will our ability to be able to pay our debts. This is something that lenders must factor in as well.
There is a lot of guidance, advice and regulations concerning irresponsible lending, depending on what you borrow and what it’s for. Most often cited are the Office of Fair Trading guidance for creditors and the FCA’s Consumer Credit sourcebook.
You don’t need to become a financial or legal expert to know if you’ve been treated unfairly. You just need to say what you’re unhappy about and provide details of your circumstances that the lender should have taken into consideration.
With products such as credit cards, you can argue that extending your credit limit without asking you allows you to slip further into debt.
Businesses should also notice patterns of behaviour from you that are red flags. This can include using gambling websites or consistently spending all of the available credit on your card as soon as the money is applied to your account.
The Financial Ombudsman sets out in detail how it looks at complaints about unaffordable lending. In terms of evidence, it will consider things like:
Other factors are also considered when deciding if lending was inappropriate. For example, one of the most common – and overpriced – forms of lending is an overdraft. Here the ombudsman looks at bank statements and reviews them to see if the limit was appropriate or acceptable.
If you think that you’ve been lent money inappropriately and the lender has put you in a position where you can’t afford your debts, you have every right to make a complaint.
You need to first contact your lender and explain why you think you’ve been put in a difficult position and ask them for help.
If the business doesn’t sort out your complaint, ignores it or make things worse, the ombudsman can look at your complaint for nothing.
You can even read a few case studies here if you aren’t sure whether you’ve been lent money inappropriately.
In the vast majority of cases, a lender would be expected to carry out a credit check with a credit reference agency, as part of their process of assessing your finances.
There are three main credit reference agencies:
It’s possible to run a check on your finances without leaving a mark on your credit file. This is known as a soft credit check, which is often employed when you use a comparison site to check if you are likely to be approved for a loan before you apply.
A formal application for credit will usually involve a hard credit check. This is where the lender looks over your credit report in full to assess your existing finances.
Hard checks remain on your credit file. If you have too many in a short period of time (usually a year) then this could suggest to a lender that you are desperate to borrow money, which means you might get turned down for credit.
So if you are considering taking out a new credit card or loan, then go down the soft check routes first where possible and remember to keep an eye on your credit file yourself.
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