Affordability complaints

A long form article looking at affordability complaints and the rules to use when helping with them.

Many high cost credit lenders have upheld complaints from customers accepting they didn’t check if the customer could repay loans without difficulty. We call these ‘affordability complaints.’

We’re covering regulated Consumer Credit agreements (most loans) and a section for guarantors in this article. We’re not covering mortgages. Although clients could potentially bring Unfair Relationships claims for irresponsible lending, we’re not covering that either.

The FCA Handbook

The FCA Handbook contains the rules that lenders must follow when deciding whether to give someone a loan. We’ll refer heavily to them so you can use them to support clients. The rules are there for advisers and any member of the public to use.

Pushed for time? Here are the 4 most important things to do

The FCA handbook is big. If you have time, using the rules might add weight to complaints. However, advisers don’t have much time, so here’s the short version.

1. Don’t hold up a complaint because you don’t know all of the FCA rules. The lender will know them and should consider any complaint by comparing it to the rules. Even if the lender ignores the rules, if the complaint is later referred to the Financial Ombudsman Service (‘FOS’ — see later in this article) FOS will consider the FCA rules. Just help your client say what happened and how it’s affected them
2. Use a template letter, but make sure it’s tailored to your client’s circumstances. Here’s our template that can be used for any complaint about a loan, including affordability complaints
3. At least be aware of the main areas for complaint. These include lenders: a) ignoring signs of financial difficulty, such as rolled-over loans, refinancing, difficulty paying non-credit bills, lots of recent credit, b) not considering foreseeable changes to income and expenditure in detail, such as increased health costs, loss of child benefit, c) not being realistic in their affordability assessment, such as using low amounts for housekeeping or other costs
4. Go back and read all the FCA rules when you have the time. It’ll help you spot what a client can complain about more thoroughly. It’ll also help you counter any lenders that say they’ve stuck to the rules.

Scenario for the article

So let’s get started…

Pawel is out of work, claims Universal Credit and lives in social housing with his two children. He left his job 2 months ago because of his chronic back problem.

His mum stood guarantor for a loan he borrowed 6 months ago when in full-time employment. The loan was for £3,000 over 4 years with an APR of 50%. He told the lender about his declining health. He received PIP for mobility which enabled him to travel to work.

The lender conducted a credit check. This was Pawel’s only loan at the time although he’d paid off 4 payday loans on time in the past couple of months. Pawel hadn’t defaulted before.

When the creditor looked at his income and expenditure they felt £30 per week for housekeeping was average. It’d make the loan affordable. They asked about his health and he said it was getting worse. Pawel explained that his mobility costs might increase if he couldn’t get to work without taxis. At that point he only needed taxis once or twice a week, so the travel figure represented this. He said he was behind on gas, electricity and council tax, but the loan would help pay them off.

Based on his credit check, full-time income, and budget, the lender agreed to lend provided he signed-up a guarantor.

Pawel has since defaulted after leaving work on ill health grounds just 4 months into the agreement. The guarantor (his mum) is now being chased for the money. She is retired, on low income but owns a house with equity.

CONC 5.2A — what Pawel could say

There are lots of rules in CONC 5.2A and advisers should read the full chapter. A complaint for Pawel could use the following rules:

A lender cannot enter an agreement until they’ve carried out and had proper regard to a creditworthiness assessment under rule 5.2A.5R. The information they assess with must be what lender’s have at the time, what a credit reference agency (CRA) provides, and what’s given by the client under 5.2A.7R.

Arguably Pawel’s lender had no ‘proper regard’ to the assessment. They knew of his declining health. With 2 children, there’s no way £30 per week was enough for housekeeping. He’s repeatedly used payday loans and was also paying off priority debts with the loan. They were on notice of his financial problems, even if he passed the credit check.

Lenders must consider if someone is likely to miss payments over the life of the agreement under 5.2A.12R. Loans mustn’t cause hardship, cause a client to borrow more, or cause them to miss other obligations.

Pawel was repaying priority debts already. The lender knew his health was getting worse. They couldn’t confidently say he could repay over 4 years.

When looking at assets and savings the lender can’t take into account any guarantor under 5.2A.14R.

This is harder to ‘prove.’ On the face of it they shouldn’t have lent the money. It’s possible they only did so as he had a guarantor lined up.

The firm must verify income. They must consider the term of the agreement and likely changes to income. Firms must justify if they’ve decided an assessment is not needed. They must demonstrate why an assessment was adequate if challenged — 5.2A.15R — 5.2A.16G.

Based on his declining health they could foresee that Pawel might run into problems. Importantly, they have to prove their assessment was adequate if it’s challenged.

Expenditure and foreseeable increases must be taken into account over the life of the agreement. This includes all bills, rent, contractual commitments and things for basic quality of life. They can estimate based on statistical data, but only were a client’s household fits the data profile of the stats they use (5.2A.17R — 5.2A.19G).

Again, it was probable that his mobility costs might increase. In any case £30 per week for housekeeping isn’t enough. If they’ve used an ‘average’ where did it come from? It’s wrong for his circumstances.

When deciding how full the assessment should be the creditor must consider each case individually. They should consider the risks, length, cost, implications…and ‘any other potential adverse consequences’ under 5.2A.20R.

Any high cost lender is lending a risky product. The interest and overall cost is high. Other implications include the impact on the guarantor and their relationship with the client. It’s reasonable to argue the assessment should be very detailed.

The assessment might be influenced by what a lender is told by the client, info they already hold, any apparent mental health or capacity issues, or signs of financial difficulty — 5.2A.22G. Firms will be expected to verify info rigorously where there is greater risk.

Again, the individual circumstances should have merited a better assessment. Lenders might have a standard process, but if they are told of declining health for instance, they should depart from it. Pawel showed signs of financial difficulty too.

Where the lender believes there is a risk to the affordability they should not lend. The life of the agreement and foreseeable changes are key under 5.2A.28R

This is the sum of all parts of the other rules. A complaint could end with reference to this rule.

A note on ‘running account’

Where someone has a running account, like a catalogue, credit or store card, it’s the credit limit that’s key.

Lenders should assume that clients use their full limit. The assessment should be based on repaying the credit limit like a fixed-sum loan, over a reasonable period of time. ‘Reasonable’ is worked out by comparing the credit limit with a fixed-sum loan of the same amount and risk. Over how many years would a loan of that value usually be offered?

If a credit limit is increased significantly, they should assess again. Repeated small increases over a short-period of time amounts to ‘significant.’ What significant means depends on the client’s circumstances and balance. See 5.2A.6G and 5.2A.28G for good guidance on this.

These assumptions can be ignored if the client is clearly able to afford the repayments.

Guarantors

Guarantors are less well protected. See our article on guarantor loans and debt advice for other issues for guarantors. The rules in CONC 5.2A are relaxed to ‘guidance’ for guarantors. In addition;

5.2A.31R says assessments must be detailed enough to ensure guarantors can meet the commitments without an adverse impact. It must be based on the info lenders hold at the time, including from a CRA, and the guarantor.

We know less about Pawel’s mother. If she’s on low income we’d look into how she was assessed along similar lines to Pawel.

Lenders should consider 5.2A.32G(5) when deciding the level of the assessment. This includes the total liability, duration, costs for non-compliance, and ‘any other potential adverse consequences…’

This was a high cost loan over a long period of time. Pawel’s mother’s house is at risk from enforcement if she can’t pay. The assessment should have been detailed including a realistic income and expenditure review.

Importantly the assessment of the guarantor doesn’t bypass the need to assess the borrower under 5.2A.32G(7).

It’s reasonable for a guarantor to ask how a lender assessed the borrower. Although lender’s can’t divulge everything, they should be confident that the assessment of the borrower was adequate.

All lenders must have written policies saying how they will assess guarantors as per 5.2A.33R.

The policy must set out how lenders assess AND record each assessment. Guarantors can ask for their assessment under the Data Protection Act 2018, and typically this is accompanied by a call recording. Did they follow their policy?

Pawn broking and overdrafts

Although FCA regulated, pawn agreements are exempt CONC 5.2A, unless the resale value of the pawned item is lower than the loan. Current accounts whereby somebody can overdraw or exceed an agreed overdraft are also exempt. Advisers could still cite the rules and guidance in CONC 5.2A as ‘best practice’ but the Financial Ombudsman Service (FOS — see later) might not hold firms to them.

Since 18th December 2019 banks must provide certain information when giving an overdraft, found in ‘BCOBS 2.2B.’ The information amounts to explaining the costs of repeated overdraft use. Additionally banks ‘may’ give more detailed information that warns that overdraft use should be short-term.

The pawnbroking trade body has a code of conduct. Part 10 deals with customer services but there’s nothing comparable to FCA rules on affordability.

However, we also have the…

…FCA Principles

All FCA regulated firms must abide by the FCA Principles for business. These are broad statements of behaviour linked to the FCA’s ‘Threshold conditions.’ These conditions must be met for a firm to keep their FCA authorisation. One condition is that a firm must be ‘suitable’. Firms that breach principles may be deemed unsuitable by the FCA. Lenders that don’t assess affordability breach principles.

The principles are open to interpretation. Clearly though, principles 2 (skill, care and diligence) and 6 (treat customers fairly) are relevant to affordability complaints.

Principle 11 — repeat offenders

If you get fed up complaining to the same lender then consider principle 11. This requires firms to be open with the FCA. In its supervision handbook ‘SUP’ a firm must tell the FCA of any significant breaches of FCA rules, guidance and principles.

Reminding a lender of principle 11 might urge them to resolve the complaint and review their practices. It’s open for advisers to contact the FCA with concerns by contacting the FCA consumer helpline. Complete evidence forms on Casebook to let Citizens Advice’s policy team know.

Using the Financial Ombudsman Service (FOS)

If you’ve helped a client to complain they should get a final response from the lender within 8 weeks. If clients are unhappy with the reply, or don’t get one in the 8 weeks, they can use FOS. It’s free.

Don’t be too ‘legal’ but your client should say what happened and how this affected them. Use the FCA rules above as they’re for everyone. FOS will look in detail at what happened. They’ll ask for more information if needed.

If the lender hasn’t dealt with the complaint thoroughly FOS will consider this too. This article isn’t about how firms should investigate complaints. However do look at the FCA’s rules in the FCA Dispute Resolution Handbook (DISP). DISP 1.3 and DISP 1.4 are most relevant. In short, a lender must investigate thoroughly and transparently amongst other things.

FOS time limits

There are 3 key rules here.

1. A lender has 8 weeks to provide a final response. If your client gets one sooner they can use FOS. If lenders don’t reply or give a final response within 8 weeks, your client can use FOS.
2. Clients have 6 months from the final response to use FOS
3. The complaint must be about something that happened within:

a) the last 6 years OR

b) the last 3 years where a client became aware of their grounds for complaint later on

The last rule is really important. In October 2018 FOS published two decisions about this issue — ‘lender C’ and ‘lender D.’

In both cases the borrowers blamed themselves for borrowing the money, and not the lenders. FOS observed that payday lending encouraged rollovers and refinancing. Borrowers saw the loans as a way of surviving. In that context, it was reasonable for consumers not to blame creditors.

Some time after borrowing, both complainants read blogs that explained that lenders had to follow affordability assessment rules and complaints could be raised where they hadn’t. At this point, the complainants felt they had grounds to complain for the first time. Therefore, the complaints about loans over 6 years old were nevertheless made within 3 years of the borrowers becoming aware of their grounds for complaint. FOS had jurisdiction to consider them.

Don’t be put off from complaining about old loans, although the ‘3 year’ rule might not help everyone. If someone should have been aware the lender was at fault earlier than they claim, FOS will establish that too.

Enforcing FOS awards

Nobody should have to chase their FOS award and in fairness it is rare lenders don’t pay (see Debt Camel for the exception of lenders in administration). If a client has to chase you might help by citing (copying in FOS):

• The FCA’s DISP handbook — DISP 3.7.12R. This makes it clear the creditor must comply with FOS. DISP 3.7.123G explains that FOS awards can be enforced in the county court.
• The FCA Enforcement Guide ‘EG’ — EG 8.5.2G. A lender might have its FCA permissions cancelled. ‘Permissions’ are the activities the FCA allows the firm to do, such as lending money. FOS reports non-payers to the FCA.
• Under schedule 17, part 3, para 16 of the Financial Services and Markets Act 2000 (FSMA 2000) a client can enforce their award in the county court;
• with reference to s85 of the County Courts Act 1984 (using bailiffs specifically)
• relying on schedule 17 of FSMA 2000 (for other types of enforcement like charging orders)
• in both cases applications are made under Civil Procedure Rules 70.5(3) on form N322A

The court application costs (we think) £100 unless the client can get fee remission. Applications can be made ‘without notice’ so clients don’t have to inform the lender first.

Getting your evidence to complain with

It’s important to gather the right evidence to back up complaints.

Under s.77 / s.78 of the Consumer Credit Act 1974 somebody can request a copy of their loan agreement ‘and another document mentioned in it.’ These requests costs £1 and if the creditor doesn’t reply within 12 working days, they can’t enforce the agreement until they do reply. This is not likely to give details of the affordability assessment unless the assessment is mentioned in the agreement.

To get the assessment make a request under s45 of the Data Protection Act 2018 (a subject access request). You can ask for any call recordings if the assessment was over the phone. The information should be provided within 1 month and for free.

In any case, the FCA rules in DISP 1.3 and 1.4 make it clear firms must engage, be transparent, fair and must cooperate with FOS. If you’re assisting a guarantor ask for the lender’s guarantor policy as per CONC 5.2A.33R.

It might help to get credit reports to show other debts and financial difficulties existed at the time. Remember though, much of the information on credit files drops off after 6 years. If your client told the lender of other debts not on the credit report, see if you can evidence these (for instance council tax, water, rent).

Importantly, take an honest account of what your client can remember saying and being told by the lender. The published FOS decisions on ‘out of time’ complaints shows that FOS considers verbal testimony too. It’s important this is consistent and obviously truthful.

Conclusion

Lots of people have had refunds from firms who gave them loans but shouldn’t have. It’s not enough for lenders to warn that missing payments has consequences and let clients decide whether to borrow. They should have proper assessment policies and refuse to lend where appropriate.

If a complaint is upheld interest and charges are removed and refunded. In many cases this will repay the remaining debt… and more! For guarantors, the result would be that their guarantee is removed, and they’re free from the loan. Modest awards can be given for inconvenience and distress.

Firms entering administration means that some clients won’t get all they are due. Complaints are time consuming and are not guaranteed to succeed so do explain this to clients. So long as clients are informed of the option and level of support you can give they will decide what they want to do. There’s a template for complaining here.

Importantly, though, there has been poor practice from lenders so affordability complaints should be discussed with clients.

Graham O’Malley is a Debt Expert in the Expert Advice Team at Citizens Advice.

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