Types of complaints we see
When we refer to short-term lending, we’re generally talking about payday loans and instalment loans – but it also includes things like open-ended credit facilities.
These types of products are often marketed at people with limited access to mainstream credit. And although the amounts of money involved may be relatively small, the interest rates are high. Because of the costs involved, they aren’t intended for long-term borrowing and usually run for up to 12 months (although some can be slightly longer).
Up until 31 March 2014 short-term lending came under the scope of the Office of Fair Trading (OFT). After this time the Financial Conduct Authority (FCA) became the regulator and introduced the definition "high-cost short-term credit". To satisfy this definition, the lending needs to:
- have an APR of 100% or more
- be due to be repaid or substantially repaid within 12 months
- not be secured lending, home credit or an overdraft
In general, the complaints people bring to us about short-term lending involve the borrower saying their loans were unaffordable and that they believe the lender acted irresponsibly in providing the credit. We also see complaints where the borrower says they're experiencing financial difficulties and can't repay their loans and they think the lender isn't treating them fairly.
Types of product we get complaints about
Payday loans are a type of high-cost, short-term lending . There are other types of short-term lending.
This product is probably the most well-known type of short-term lending. They usually involve someone borrowing between £50 and £1,000, to be repaid, plus interest, on or shortly after their next payday. This means the capital and interest must be repaid in full, in one instalment.
Some lenders will allow borrowers to “roll over” their payday loan. If this happens, at the time the original capital and interest is due, the borrower will only pay the interest. Then approximately a month later (typically after their next payday) the borrower will repay the full amount of interest and charges. In some cases we see this has happened several times.
Some lenders will also allow customers to “top-up” the amount borrowed. This generally involves the borrower asking for extra money after taking the initial loan, which will be repaid (plus interest) at the same time as the original loan was due.
Here, a borrower takes out a loan with multiple repayments, which are usually made monthly. The term of the loan can vary – and we see a range of repayment arrangements, ranging from two repayments up to around 12 or sometimes more. Some lenders also allow overlapping loans, so their customer will be able to take out further loans whilst they’re still repaying a previous loan.
Equal instalment loans
A specific type of instalment loan. The total amount repayable is spread across the whole term equally, so each month the customer will repay the same or similar amount. This means the customer is paying interest and making payments towards the capital.
Varied repayment instalment loan
The amount the customer needs to pay differs from month to month, usually with the highest amount being due in the second or third month.
Repayment loans with balloon payments
The customer only repays the monthly interest each month until the last repayment date when they must pay back the total amount borrowed and the last month interest. Sometimes, this is referred to as a “payday loan with deferred repayment option”.
Revolving credit (also known as flex credit or running credit)
This is an open-ended credit agreement, which allows the borrower to make multiple draw-downs as long as it's within the credit limit. Although there’s no fixed end date, the credit is only meant for short-term use because of its high interest rate. Loan agreements may include a hypothetical repayment schedule over 10 months.
What we look at
When someone contacts us about short-term lending we’ll ask:
- Did the business do everything it was required to do?
- And if they didn’t, has their customer lost out as a result?
Our answer to a complaint will reflect what’s fair and reasonable in the circumstances. And in considering what’s fair and reasonable, we’ll consider relevant law and regulation, regulators’ rules, guidance and standards, codes of practice, and what we consider to be good industry practice at the time.
In light of this, for short-term lending we’ll ask questions such as:
- For each loan, did the lender carry out reasonable and proportionate checks to satisfy itself that the potential borrower would be able to repay the loan in a sustainable way?
- If they didn’t carry out these checks, would reasonable and proportionate checks have shown that the borrowing could have been repaid sustainably?
- Given this type of loan is intended for short-term use only, did the overall pattern of lending increase the indebtedness of the person involved in a way that was unsustainable or otherwise harmful?
- Did the lender act unfairly or unreasonably in some other way?
Although this information isn’t exhaustive, there are a number of key laws, rules and standards that lenders need to consider – and which they and we will need to take account of when looking into complaints from their customers.
In summary, it’s clear from both the OFT’s Irresponsible Lending Guidance and the FCA’s Consumer Credit Sourcebook (CONC) that both regulators required an assessment of affordability which was proportionate – to determine if a prospective borrower would be able to repay their loan. And both regulators provided guidance that lender could consider when completing this assessment.
In addition, both regulators have stressed that these products aren’t suitable as a longer-term source of credit – and that there’s potential for consumer detriment if they are used in this way.
The Office of Fair Trading (OFT) and the Consumer Credit Act 1974
Before April 2014, the regulator for this type of credit was the OFT. The Consumer Credit Act 1974 (CCA) set out the factors which the OFT needed to consider when deciding whether to give a business a consumer credit licence.
The OFT also asked lenders to complete a borrower-focussed assessment of affordability. This was to see if the prospective borrower could afford to repay the money in a sustainable manner. This is set out in the OFT’s March 2010 guidance for creditors for irresponsible lending.
There was no set list of checks a lender needed to complete. But the checks should have been proportionate to the circumstances of each loan. This could include considerations about the amount borrowed and the prospective borrower’s borrowing history. Section 4.12 of the Irresponsible Lending Guidance gave examples of the types and sources of information a lender might want to consider. In 2011, an assessment of creditworthiness also came into force in the CCA.
Section 6.25 of the OFT’s Irresponsible Lending Guidance said, in relation to short-term loans, that it would be a deceptive and/or unfair practice (which in the OFT’s view may constitute irresponsible lending practices) if a lender were to repeatedly refinance (or 'roll over') a borrower's existing credit commitment for a short-term credit product in a way that is unsustainable or otherwise harmful.
Section 6.25 also said:
- the OFT considers that this would include a creditor allowing a borrower to enter into a number of separate agreements for short-term loan products, one after another, where the overall effect is to increase the borrower's indebtedness in an unsustainable manner
- the general purpose of short-term loans, such as 'payday loans', is to provide borrowers with a cash advance until their next pay day and they are usually about 30 days, or just over, in duration (however, in certain circumstances, the borrower can elect to 'renew' the loan for a fee and delay payment for a further agreed period of time)
- the purpose of payday loans is to act as a short-term solution to temporary cash flow problems experienced by consumers (they are not appropriate for supporting sustained borrowing over longer periods).
The Financial Conduct Authority
The FCA took over the regulation of consumer credit from the OFT in April 2014.
The Consumer Credit Sourcebook (CONC) part of the FCA’s handbook refers to sections of the OFT Irresponsible Lending Guidance (including section 6.25).
CONC is clear about the need to complete a “credit worthiness assessment”, considering the potential for the lending commitment to “adversely impact the consumer’s financial situation”. (CONC R 5.2.1 (2)). CONC replaced certain sections of the CCA including:
- from July 2014 the FCA introduced a rule that high-cost short-term lending couldn’t be refinanced on more than two occasions (unless exercising “forbearance” – to help a borrower in financial difficulties). This is set out in CONC 6.7.23. R.
- on 2 January 2015, the FCA introduced a price cap on the interest and charges short-term lenders can charge. This came into force from 2 January 2015.
The main points of the FCA price cap are:
- daily interest and fees must not exceed 0.8% of the amount borrowed
- default fees should be no more than £15 in total
- the total interest, fees and charges (including those on any connected agreement) shouldn't be capable of coming to more than the amount borrowed
There is more detail in CONC 5A. CONC 5.2.3 [G] outlines that the assessment the lender needs to complete should be dependent on, and proportionate to, a number of factors – including the amount and cost of the credit and the consumer’s borrowing history.
CONC 5.2.4 [G] gives guidance on the sources of information a lender may want to consider as part of making a proportionate assessment. And CONC rules specifically note and refer back to sections of the OFT’s Irresponsible Lending Guidance.
Looking in particular at repeat lending CONC 6.7.22G says:
- a firm should not allow a customer to enter into consecutive agreements with the firm for high-cost short-term credit if the cumulative effect of the agreements would be that the total amount payable by the customer is unsustainable
This guidance specifically refers back to ILG 6.25.
Putting things right
If we think something has gone wrong with short-term lending, and the borrower has lost out, as a result, we typically ask the lender to:
- refund the interest and charges their customer has paid
- add 8% simple interest
Our starting point is that the borrower has had the benefit of the money they borrowed, so it’s fair that they should pay it back. But there will be some circumstances when we don’t think this is fair. One example might be where the borrower now has more pressing priority debts, which there would be serious consequences of not repaying.
We’re also likely to tell a lender to make sure their customer’s credit file doesn’t have any adverse information recorded about the loans we’ve identified as unaffordable. If we decide that someone's pattern of borrowing has become clearly unsustainable, we’re likely to tell the lender to get these removed from their customer’s credit file completely.
Why was I given a payday loan I couldn't afford?
I’m taking out payday loan after payday loan – and I can’t get out of my debt
I started with one payday loan five years ago, and now it’s cost me everything
Businesses and consumer advisers can contact our technical desk on 020 7964 1400 for general information on how the ombudsman might look at a particular complaint, or for guidance on our rules and how we work.
Read some of the key decisions we've issued in this area.
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