Business, Innovation and Skills CommitteeWritten evidence submitted by the Financial Ombudsman Service

Having watched your recent evidence session on payday lending we were really pleased to see the committee’s emphasis on using complaints as a means of learning about problems in the market. Our Service—which has a mandate to resolve disputes across the financial services sector—has received several hundred complaints about payday lending in the past twelve months, and we thought it might be helpful to tell you what we’ve seen.

hidden rights?

More than any other feature of the market, we’ve been very surprised by the comparatively low number of complaints that come to our service. Last year, consumers referred over half a million new complaints to us—most of which were about PPI. But out of more than 130,000 non-PPI complaints only 542 were about payday lending. Although that was an 83% increase from the previous year (and it is still rising), it led us to worry that consumers who have a problem might not know that we can help.

We know that those who use short-term loans are often vulnerable or reluctant to disclose to others their use of these products. We have therefore invested a great deal in making sure that we offer an accessible (and visible) service that caters for those who are most in need or most vulnerable. As part of that outreach work we recently partnered with CAB to raise awareness as part of their payday lending campaign.

Lenders also have an obligation to tell dissatisfied consumers that they can come to the ombudsman if they’re not happy with the response to their initial complaint. In reality, most consumers will only think of approaching us at this point, so it is essential that businesses include these “referral rights” in their initial complaints handling. But we see increasing evidence that the right of consumers to pursue their complaint with the ombudsman is being obscured by some lenders (intentionally or otherwise).

Earlier this year we undertook some internal research on whether the customers who did come to us were given their referral rights. The numbers (as above) were of course quite small, but of the sample of cases we looked at a significant number either failed to tell the consumer about our service or didn’t issue a final response to the consumer at all. So we were reassured—if disappointed—to see that a wider piece of research from BIS seemed to confirm a number of our suspicions (https://www.gov.uk/government/publications/payday-lending-research-reports). While some of the industry clearly acts responsibly when faced with a complaint, this wider failure of parts of the market to deal with complaints correctly is not just bad news for the consumer, but bad news for the industry. It is robbing regulators (and others) of intelligence about individual cases and trends.

We are very glad to see that both the OFT and the FCA seem to be taking this deficiency seriously and want to do something about it as they think about the transfer of jurisdiction.

Complaint Trends

The complaints that do come to us—although they represent only a fraction of the total—also suggest that too many lenders are failing to handle problems in the right way. Over the past year we have upheld the consumer’s complaint in almost three quarters of cases and most of these complaints were about a few common themes.

Some of these have already been well documented by others—such as examples of providers offering plainly unaffordable lending, an unwillingness from some lenders to accept a suitable repayment plan, or mismanagement of hardship generally.

Others have perhaps had less coverage. Many were about how the lender had used the continuous payment authority given in an inappropriate way. Typical problems involved the lender taking payments unexpectedly or repeatedly attempting to take payments when it was clear that the consumer did not have any available funds to make the payment. We’ve also seen cases where some degree of fraud has been alleged by one of the parties (for example, that someone has taken out a loan in someone else’s name)—these can be especially difficult cases to resolve. As you would expect, some providers clearly manage complaints better than others, but the average performance is not encouraging on the basis of what currently reaches us.

Overall, the volumes of complaints we see are—at the moment—too small for us to be able to draw reliable conclusions about the market as a whole. And so we cannot say how far our experience is repeated across the sector more generally, but we thought it might be helpful to share our early intelligence (which we have also shared with the relevant regulators).

Please let us know if there’s anything more we can offer.

Tony Boorman
Deputy Chief Executive and Deputy Chief Ombudsman

22 November 2013