The recent news that payday loan company, Wonga, has sought a £10million bailout is an ominous reminder of the challenges currently facing the consumer credit industry as regulators, consumer groups, and claims management companies focus their attentions on high cost short term credit providers.

The latest document to come from the Financial Conduct Authority details the regulators’ Creditworthiness Policy Statement and while it does promisingly recognise the need to keep the regulations proportionate, the approach may come as too little, too late for some lenders.

Over-regulation presents its own challenges, but many in the consumer credit industry are experiencing the same issues faced by Wonga, as they are having to deal with a significant spike in claims being directed towards the Financial Ombudsman Service, driven principally by claims management company activity.

While many cases may be genuine, the credit industry’s chief bugbear is the behaviour of sham Claims Management Companies (CMCs) that are using industrialised processes to send thousands of bogus compensation claims into FOS.  They use pro forma, template complaints letters, without conducting any due diligence or fact-checking in advance. It is alleged in many instances, that consumers will not even know a claim is being made on their behalf.

Such disingenuous behaviour is clearly not limited to the credit industry as the Solicitors Regulation Authority updated its warning notice on 9^th August 2018^[1] with advice to law firms who act in personal injury cases, particularly holiday sickness claims.  The notice, which sets out the expected standards, notes the SRA are investigating firms involved in holiday claims, with potentially improper links with claims management companies. They are also seeing firms pursuing claims without the proper instructions of claimants.

Failure to complete due diligence may explain why the proportion of claims brought against credit companies by CMCs rose from 9% in 2016/17 to 22% in 2017/18. Anecdotally, those numbers will spike even more alarmingly this year as the window for PPI claims starts to close and CMC’s are turning their attention to other avenues of opportunity such as payday loans.  The recent comments by Wonga^[2] that the company has seen an increase in claims relating to legacy loans is echoed by many but is a particular blow to some SME credit businesses as every single complaint taken on by FOS costs an SME business £550 regardless of whether the claim is legitimate or not.  Consequently it is important that the industry has confidence that the regulator can and does identify any malign activities of the claims management industry who send thousands of vexatious complaints to an over-stretched Ombudsman in the hope that they won’t be rooted out.

The need for trust in FOS is doubly important because it is being given new powers as it extends its remit to handling complaints from larger SMEs in the aftermath of banking scandals such as RBS / GRG and interest rate swaps.

Likewise, on 1^st April 2019, the FCA becomes the regulator for all CMC’s . We await the results of this with bated breath and hope that this action will finally curtail the practices of pursuing dubious claims.

^[1] http://www.sra.org.uk/solicitors/code-of-conduct/guidance/warning-notices/Holiday-sickness-claims–Warning-notice.page

^[2] https://www.telegraph.co.uk/business/2018/08/04/wonga-rescued-investors-raise-10m-cash-lifeline/