According to the Financial Ombudsman Service (FOS), there’s been an unprecedented rise in the number of complaints about credit cards and unaffordable lending.

Credit cards are now the second most complained-about product made to the ombudsman, with 5,660 complaints registered in the last three months of 2023, up from 3,216 cases for the same period a year before. Those figures are eyebrow raising in themselves. But the fact that 3,086 of those complaints are about credit that was lent inappropriately (up from a mere 665 the previous year) really got my attention.

We’ve seen a number of mis-selling scandals over the last two decades involving businesses lending people money irresponsibly. From payday lending to 125% mortgages, the financial sector seems to go through phases where certain types of lending or credit are pushed aggressively, only for things to go wrong when people start defaulting.

But what makes lending ‘unaffordable?’ And what are businesses supposed to be doing to check we can afford the credit we’re being given? I’m going to answer those questions and more in this week’s column. But first, a warning…

Why has there been a huge rise in unaffordable lending complaints?

When I spoke to the ombudsman, they confirmed that around three-quarters of the credit card and unaffordable lending complaints were brought by ‘professional representatives’, compared with just a quarter of these complaints the previous year.

You can ask any third-party – like a friend or colleague – to make a complaint on your behalf to the ombudsman, but in this instance, professional representatives generally means claims management companies (CMCs). Remember them?

Back in the days of the PPI mis-selling scandal, the failure of the banks and brokers to pay out compensation meant they inadvertently created a monster. CMCs appeared from seemingly nowhere when it became apparent that billions was owed in compensation, scenting easy money. By offering to help make complaints on your behalf, CMCs offered to take the pressure off the public and the confusing world of PPI compensation. Except they didn’t. Claims managers actually just got their customers to fill in exactly the same complaint questionnaire that the ombudsman asked every complainant to fill in. They then took anything up to 40% of the compensation payout in payment. 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. That meant the CMC growth industry hit a severe setback and many businesses went under. The remainder of CMCs began to look for new mis-selling scandals and focused on packaged bank accounts – though the compensation for this was much smaller.

However, it now seems that claims managers are back and are focused on unaffordable lending. According to the Financial Ombudsman, 7,500 complaints about unaffordable or irresponsible lending were made last year across a range of financial products. Seven in ten of these were made by CMCs.

But here’s the kicker. Only 14% of CMC cases were upheld by the ombudsman, versus a whopping 44% of unaffordable lending cases brough by individuals.

According to Viv Kelly, the Ombudsman’s Director for Consumer Credit, many of these 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.”

Certainly, the complaints I’ve seen from claims mangers are often ‘cut and paste’ jobs, which fail to address their customer’s individual experiences – which is the key to a complaint being upheld.

So the moral is, don’t use a claims manger if you’ve got a lending complaint; make it yourself.

What is unaffordable lending?

There are loads of different types of loans, mortgages and credit out there but each lender must assess if you can afford the amount they are lending you.

Of course, the higher the sum, the more checks the lender must make. The rules tend to get much stricter too. So you’ll have to jump through a number of hoops to get a mortgage, as I’m sure anyone who has bought a home in the last ten years will be aware. The regulator, the Financial Conduct Authority (FCA) has loads of rules around lending, depending on the financial product. But each lender has a bit of leeway to decide who they want to lend to.

This makes sense, because if there was a ‘one size fits all’ approach to lending, then if 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 they 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 – like credit cards – are ongoing 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 too.

Whenever I write about unaffordable lending, I hear from readers who argue that I’m making excuses for people who aren’t taking responsibility for their own actions. ‘Don’t spend it if you can’t afford it’ is the most common refrain, and to a certain degree I agree. But it’s important to note that with unaffordable lending complaints, it’s rare for the debt to be wiped or even reduced. We do have to take responsibility for the money that we spend. However, if lenders are allowing or encouraging us to overspend, letting us sleepwalk in to debt or borrow beyond our means, then they are responsible for sending us down the path of temptation.

What checks are businesses supposed to make when lending money?

There’s a ton of guidance, advice and regulations around 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. There’s are industry guides and aren’t very user-friendly for most people.

As I often say in this column, 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 in your own words and provide details about your circumstances that the lender should have taken in to consideration.

With things like credit cards, you can argue that extending your credit limit without asking you is allowing you to slip further in to debt unwillingly. Businesses should also notice patterns of behaviour that are red flags, like using credit on gambling websites, or people constantly spending the last bit of available cash on a card as soon as that month’s credit is applied to the 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 application forms, credit file searches, income and expenditure data and checks and verification of personal details.

Other factors are also considered when deciding if lending was inappropriate. For example, one of the most common – and overpriced – forms of lending is the humble overdraft. With these cases, the ombudsman looks at bank statements and reviews to see if the limit was appropriate or acceptable.

If you think that you’ve been leant 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. Just contact the lender and explain why you think you’ve been put in a difficult position and ask them for help. If they don’t sort things out, or make things worse, the ombudsman can look at your complaint for free. You can even read a few case studies here if you aren’t sure if you’ve been lent money inappropriately.

What about credit checks?

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; Experian, Equifax and TransUnion. Experian has a useful guide to credit checks and how they work here. 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. When you use a comparison site or check the option to see if you’re likely to be approved for a loan before officially applying, the soft check is most often used. However, a formal application for credit will usually involve a ‘hard’ credit check.

A hard check is where the lender looks over your credit report in full to assess your existing finances. This difference matters because hard checks remain on your credit file. If you have too many hard checks in a short period of time (usually a year) then this indicates that you’re a little desperate to borrow cash, 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 regularly. Loads of the complaints I see about credit files arise when people apply for lending only to find that something on their file is blocking the application. You can appeal things that are incorrect, but delays are the last thing you need if you’re applying for something major, like a mortgage.

Featured in Times Money Mentor – Martyn James

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