Many consumer credit firms are struggling to cope with the volume of complaints they're receiving. Jarred Erceg looks at how claims management companies have increased levels of redress claims against the sector, and what you can do to manage this.
The Financial Ombudsman Service (FOS) has seen a dramatic increase in complaints about the consumer credit sector, most notably about guarantor loans and home credit.
Guarantor loans were the most complained about product for the quarter ending December 2020, with the FOS receiving more than 10,000 complaints, compared with just over 300 the year before. Complaints relating to home credit rose from 431 to 6,091 over the same period 1. Most of these complaints relate to lenders’ inadequate affordability checks.
Increase in CMC activity
Claims management company (CMC) activity is playing a large part in this rise in claims. The growth of the CMC industry was borne out of the PPI mis-selling scandal. But now the deadline for new PPI complaints has passed, the focus has switched to consumer credit.
According to the FOS, CMCs are involved in 54% of complaints about credit products, compared with an average of 35% in the FOS casework as a whole 2. The proportion of CMC activity is higher in certain products, with the FOS reporting that eight in 10 complaints about home credit were brought via a CMC 3.
This level of CMC activity is causing significant challenges at many consumer credit firms. CMCs can generate an extremely high volume of claims against a lender in a very short period. There have also been questions about the conduct of CMCs themselves, with instances of duplicate claims being submitted, or claims on behalf of individuals who have never taken out a loan with the firm.
Our experience in recent administrations of consumer credit firms, including Wonga and CashEuroNet, shows that the claims generated by CMCs were a factor in the firm’s demise.
Consumer credit firms face burden of increased claims
Consumer credit firms need to be mindful of the effect a large number of claims can have on resources and liquidity. As firms will appreciate, the impact of such claims is much wider than any redress payments or loan balance adjustments that need to be made in favour of the customer. The cost involved in the claims management process, including system and platform developments, and training and personnel required to look back at records to adjudicate those claims is significant.
The FOS requires that each claim should be looked at on its own merits, which makes it difficult to automate the process entirely. As well as the cost of redress payments to customers and loan book adjustments, a consumer credit firm must also pay fees of £650 for each case referred to the FOS, regardless of the outcome.
The surge of complaints by CMCs is particularly onerous for consumer credit firms when looking at historic claims. The FCA started regulating the sector in 2014, but the FOS is imposing the stricter consumer protection standards introduced in 2014 to loans made prior to that date. This stance has been re-confirmed by a recent court case.
In August 2020, the High Court judgement in Kerrigan vs Elevate upheld a complaint against the payday lender Elevate Credit International Ltd (in administration), which traded as Sunny. The judgment ruled in favour of an ‘unfair relationship’ claim, which was viewed to exist where inadequate credit assessments were undertaken when the claimant made repeated loan applications.
‘Unfair relationship’ claims continue to have a wide potential application, especially true in the case of historic rule breaches given the generous limitation periods allowed for such claims, as well as the need to interpret rules and guidance from many years ago.
Managing CMC related claims
Consumer credit lenders need to ask themselves whether they have appropriate systems that would stand up to FCA scrutiny in place to adequately manage claims handling, including those received from CMCs. The problems that consumer credit firms can face handling CMC related claims demonstrates how important it is to have the systems, knowledge and resources in place to proactively manage the claims handling process. Consumer credit firms should consider appointing a CMC liaison to establish and maintain relationships with CMC firms. Our experience with the consumer credit sector shows that regular engagement can be productive.
Scenario planning, operational resilience and engagement with the FCA
Consumer credit lenders need to undertake detailed scenario planning to provide more realistic financial foresight and a better understanding of the resource requirements that CMC-related claims can put on the business.
It's important to be realistic about the volumes of claims and customer engagement that firms could face, as well as projected uphold rates. Forecasts should be all encompassing, including costs associated with training and resourcing the complaints handling process, not just any potential redress payments.
Developing robust internal policies, along with a renewed focus on operational resilience, is a way of ensuring and evidencing compliance with all regulatory standards, thereby mitigating the risk of such complaints. Maintaining detailed records of due diligence and creditworthiness tests will also help when responding to any regulatory issues or complaints.
Lenders should be aware it is likely that the FCA will scrutinise closely how lenders deal with coronavirus-related issues. The FCA should also be viewed as a key stakeholder for consumer credit firms. Consider engaging with the FCA as soon as there are any concerns about complaint volumes.