High-cost, short-term credit affordability complaints: The ‘next PPI’?

Posted: 25th September 2018

Commentators often speculate or try to predict what the next large-scale mis-selling scandal will be for the financial services industry to deal with.

History tells us there have been various industry-wide reviews into pension and endowment mis-sellings in the late nineties and early noughties. Bank charges threatened to be next, but legal challenges and industry agreements resulted in a more workable solution. The ongoing remediation exercise of the current decade has obviously been the handling of PPI mis-selling, with hundreds of thousands prompted – through a bizarre but effective ad campaign – to make complaints by the animatronic head of Arnold Schwarzenegger. “Do it now!” came the call, and the message was clear: further complaints will be time-barred from August 2019.

Many have speculated that interest-only mortgages would be the next issue to be redressed, but this has not materialised, probably because the point of realisation is at the maturity of the original mortgage and many customers continue to successfully service their debt. Other potential issues are currently being dealt with through regulatory supervision programmes, for example, the thematic review into annuity sales practices and the review of defined benefit pension transfers.

In both cases, given the regulator is managing the remedy through prescriptive programmes and intervention, this is unlikely to escalate to mass complaints. Plus, the fact that theses are complex products means that the average consumer is unlikely to know that they even have an issue, unless there is a similar publicity campaign to the one starring the FCA’s robotic Schwarzenegger.   

Is High-Cost Short-Term Credit affordability a looming issue?

To identify whether there are any looming large-scale industry issues, it is probably useful to look at some of the characteristics that have typically driven them in the past.

Volumes

The number of complaints always tends to be a key trigger for the FCA and the Financial Ombudsman Service (FOS). We know that, currently, complaints volumes are continuing to grow, so the issue is likely to be rising up the agendas of the FCA and FOS simply from a numbers perspective.

Furthermore, the most recent figures from the FOS show that a sizeable portion of FOS referrals in H1 2018 came from customers of consumer credit firms. Indeed, the firm with the largest number of FOS referrals during the period was a consumer credit firm operating in the high-cost short-term credit (HCSTC) market.

Regulatory interest / intervention

Another key trait that defines an issue bubbling under the surface is the amount of interest being generated through regulatory intervention. If we look back to when the PPI complaints bubble started to inflate, this was largely following regulatory intervention – in the form of both enforcement activity against individual firms and following a series of thematic reviews into sales practises.

Looking at the environment today, a number of high-profile events have recently occurred within the HCSTC sector that could indicate a 'complaints bubble' beginning to grow:

• In May 2018, the FCA published its High-Cost Credit Review and consultation paper
• In its most recent annual report, the FOS made specific reference to its concerns on the high volume of complaints received in relation to HCSTC and affordability
• In August 2018, HCSTC firm Wonga entered administration, with the number of claims for compensation being cited as one of the key reasons for this
• Ongoing parliamentary attention on the activities of the wider industry

Claims Management Companies (CMCs)

Similar, again, to the way the PPI situation initially developed is the presence of CMCs in the equation. Many firms are being inundated with mass claims from CMCs on behalf of multiple customers at the same time. This impacts on the operational performance at firms and can be a real contributing factor to pushing regulatory timelines and the handling of complaints beyond the guidance of eight weeks, thus triggering FOS rights. And, even when firms can handle cases within eight weeks, those within the consumer credit sector tend to have higher FOS uphold in the favour of the customer compared to cases involving mainstream lenders.

The current environment is one of growing complaints numbers, encouraged and enhanced by the increasingly sophisticated activities of CMCs. This is all occurring in a regulatory environment of heightened scrutiny which is finding firms at fault in roughly half of the cases referred to the FOS.

Looking ahead to the handling of complaints

Firms operating within this sector clearly need to do something to ensure that they are set up to handle complaints efficiently and effectively giving the high volumes and continuing growth we are witnessing – but also in a way that delivers fair outcomes for customers and result in FOS overturn figures falling.

To achieve this, there are a number of things which firms should be looking at and considering changing. These are:

Policy, process and procedures

Firms need an appropriate complaint handling policy and process in place that enables them to assess and investigate the true nature of the complaint.

In the case of affordability complaints, this will involve looking back at the decision to lend and seeing whether or not, with the information available to it, it was reasonable to assume that the customer could have afforded to meet their payments at the outset of the loan.

The FOS will be interested in how a firm makes this assessment and whether there is evidence retained to support that lending decision. Where there isn’t, it is likely to be difficult to justify the original decision. Relying on incomplete third-party information is unlikely to pass the test. Much can also be taken from FOS adjudications and Ombudsman decisions. If there are common areas in which the FOS continues to find failings within a firm, this should be fed back and addressed within the complaint handling policy, process and procedures.

Operating model

Firms’ operating models need to be flexible enough to deal with increasing complaint numbers. There should be a clear understanding of how cases flow through the model and where the key points of stress can be when volumes are high. Equally, there needs to be options to redeploy staff into the complaints team if this is needed. The operating model should also ensure that there are robust systems for reporting in place so that management can receive the right information to be used in decision making. The published FOS figures show that consumer credit firms report higher FOS overturns compared to banks, so senior managers need to be reacting to this through the management information they receive.

Capacity planning

Aligned to the operating model above, capacity planning is a vital activity which can inform the operational management of the complaints team to ensure that surges are managed as well as possible. Firms should have in mind a baseline plan, the robustness of which can then be assessed against a number of hypothetical scenarios. This will help the firm understand how they are likely to able to respond and what contingency plans may need to be put in place.

In turn, this should allow a better understanding of how sustainable the current operating model is. Typically, firms choose to only react when a surge situation has been occurring for a number of weeks. This reactive approach can come too late to have any real difference if an issue has already built up. Having in place robust plans are, therefore, a must have for any complaint handling function.

Quality assurance

Quality Assurance is the second pair of eyes over any complaint and should act as an independent ‘conscience’ check that the right outcome has been delivered for the customer. Operating well, quality assurance should be able to call out issues regarding the complaint handling policy, process or procedures that are getting in the way of delivering fair customer outcomes.

The factors that are usually focussed on by quality assurance include the level of competence of the complaint handler, the type of complaint that has been raised (i.e., complex affordability issues vs simple service failure), the volume of complaints being raised and whether there are any known typical failings that require additional oversight.

The next big issue?

In summary then, time will tell as to whether or not complaints related to affordability will become the new industry wide issue. What is certain though, is that there is increasing pressure on firms to handle affordability complaints in a fair way, and that this pressure is coming from customers, regulators and CMCs. Firms need to consider the way they are approaching this and plan accordingly.

With volumes and FOS referrals continuing to rise, ensuring you have an appropriate plan in place must be a priority from a customer and commercial outcomes perspective.