CCTA Response to FOS feedback statement on its consultation on temporary changes to reporting the outcomes of proactively settled complaints

Published 02 November 2021

“Unfortunately, the FOS has missed out on an opportunity to deal with the backlog of complaints it faces”. “At such an early stage, where the decision still rests with the customer, ask the lender to take one more look. The customer can accept an improved offer, with the comfort that if they have any concerns, they can carry on with the FOS investigation. This could have been the simplest of systems”. “However, this new process includes a check on the offer made by the lender, bringing with it delay as the FOS carries out a review. There will be a new administration system as we count these cases. There will also be the application of a £750 case fee each time, no matter what happens”. “From the engagement we have had with members, some lenders are surprised that the FOS seems to have rejected a simpler process. There is less surprise that the FOS are keen to continue charging a full case fee”.

Is the cost of living on the increase?

Published 25 October 2021

We are being told that there is a rise in the ‘cost of living’ but what does this mean? Simply that the necessary costs we all face are going up, but what is driving this rise now? September saw a slight drop in inflation, but economists predict this is likely to only be a temporary dip before the rate continues to rise into next year. A rise in the level of inflation means the costs of goods and services have gone up, and this translates into a struggle for many as they try to manage their family finances, especially if wage growth cannot keep up. We have all read about increases in the price of fuel, food, and other costs in recent weeks. Some of us will also have struggled to fill up at the pumps or find everything we want at the supermarket. These shortages and rising prices will translate into bigger household bills for many as we look towards Christmas. This comes at the same time as many of the Covid-19 support schemes are being withdrawn. The Bank of England (BoE) has said it will have to act soon on rising inflation. This means that an imminent rise in interest rates is likely, with the hope of the reducing the price of goods – but this will mean higher costs for borrowing across many credit products. For CCTA members, the higher costs of living will need to be factored into lending decisions. They will need to think about what this means for affordability assessments. For some, these additional costs will mean that credit is no longer affordable. Undoubtedly, the effect of the pandemic is at play here, along with some of the supply chain issues caused by Brexit. Rishi Sunak will deliver his Autumn budget later this week, where he will try and address some of the pressures on households. We have already seen that the National Living Wage is to rise. The BoE rate setting committee is next due to meet in early November. Only then will we get a truer picture of how this will play out. It remains to be seen if this is simply how we move out of the pandemic and beyond the teething problems of Brexit, or if tougher economic times are here to stay.

CCTA comment on HM Treasury consultation on the regulation of BNPL

Published 21 October 2021

CCTA commenting on HM Treasury consultation on the regulation of BNPL said: “The consultation on BNPL is welcome, but it highlights that the current regulation of consumer credit is complex and unwieldy. These products should already be regulated by the FCA, but the system takes too long to change.” “We support BNPL regulation, including checks on a customer’s ability to repay if they are taking instalment plans. We also need increased visibility of this form of borrowing on credit records. BNPL use is currently invisible and means other lenders are making decisions without seeing the whole picture”. “Consumers using BNPL who fall into financial difficulty should receive the same protection as users of other consumer credit products. They should also be able to use the Financial Ombudsman Service as an independent method of dispute resolution.”

Burning questions
An introduction to the Financial Ombudsman Service

Published 14 October 2021

Who are you? We were set up by Parliament in 2001 under the Financial Services and Markets Act (FSMA) as a free and informal alternative to the courts to resolve complaints between financial businesses and their customers. As well as FSMA, we follow the FCA’s Dispute Resolution (DISP) rules. How are you funded? We are funded by a combination of a levy and case fees. Importantly, financial businesses don’t currently pay a case fee for their first 25 complaints of each financial year. This means that most financial businesses never pay a case fee. We publicly consult on our plans and budget each December and we would welcome your views. I’ve received a complaint. What do I do? DISP describes a complaint as any expression of dissatisfaction. This may seem basic, but it’s important. Once a consumer or their representative presents you with a complaint, you have eight weeks from that point before they can refer it to our service. The rules don’t allow for the eight weeks to be extended, so it’s important that you engage with the complaint from the outset. Final Response Letters (FRLs) are important. Not only is it a chance to resolve the complaint, it’s also the first we’ll see of your argument. If you don’t think the complaint is one we can look at (for example, if you think it is time barred) it is important you are clear about it in your FRL. If you’re not sure how to answer a complaint or how we’ll look at it, you don’t need to wait for it to be referred to our service before you speak to us. As well as online resources that set out our approach in detail, including published decisions, our technical desk is available to answer questions about how we deal with complaints. You can contact our technical desk either by phone on 0207 964 1400 or email at technical.desk@financial-ombudsman.org.uk. How do you approach complaints? The majority of complaints we see in consumer credit (alternative lenders in particular) are about irresponsible lending. Our approach to these complaints is well established and is rooted in longstanding regulatory principles. The four key pillars of our approach to affordability are to ask whether: • proportionate affordability checks were completed before lending • those checks were borrower-focused. It’s not sufficient for lenders to consider only whether they are likely to get their money back • checks have adequately assessed the sustainability of the lending, thinking about the customer’s wider financial situation. Repeat lending is a particular indicator that lending has become or is becoming unsustainable. • firms have appropriately monitored how customers are repaying debt and whether they stepped in where there are signs of financial difficulty. These pillars are based on longstanding regulatory principles going back at least ten years and examples of good industry practice which go back further still. We set out on our website which specific rules within the OFT’s Irresponsible Lending Guidance and the FCA’s CONC handbook set out these …

What lies ahead?
Looking to the future of consumer lending

Published 14 October 2021

Autumn is a time for discussion, and this year the impact of Covid-19 is on the agenda. One of the traditions of Autumn in the trade association world is that it is time to hold business events. We had our own Autumn Summit, while others are running workshops, conferences and roundtables. Many have returned to physical events, others remain virtual. Having spent the best part of two years living in extraordinary circumstances, there is an understandable wish to comprehend the impact of the Covid-19 pandemic and predict what it might mean for future lending. In some areas the impact is more obvious, with a tale of growth. No one can deny that the growth of online shopping is one of the reasons why we have seen an explosion in unregulated Buy-Now Pay-Later (BNPL). The seeds were sown before the pandemic, but they have been very effective in making themselves part of the customer journey. So much so, that the Financial Conduct Authority was unable to ignore the expansion of this credit-like product just outside its perimeter. In a review of consumer credit (the Woolard Review) with so many problems and issues to consider, it was the regulation of this sector that dominated. Now the question for BNPL is what that regulation will look like and the impact it might have on the sector. What is clear is that this model will be around for the future. Over in car finance, there are so many questions about whether behavioural change will impact on the lending market. Has the pandemic changed driver habits? Will it alter levels of demand or see demand for certain vehicle types? I was recently invited to give our views about the future at the Car Finance Conference run by Credit Strategy. I was happy to talk about what our members have told us about motor finance. The drop in demand was matched with a drop in supply as many dealerships pulled back from the market. Pent-up demand has led to some spikes in sales, especially around used cars. The impact of supply chain problems on the availability of new cars is also a big issue. But my message was that looking forward is complex. The daily commute is such a big part of car use, and yet the newspaper headlines would tell you very different stories about its future. The death of the office; the return to the office; the drop in inner-city prices as people flee city; the bounce back of city prices as people want to return. That is before we think of all the other dynamics in play. There are so many elephants in the room, including the challenge to make the switch to electric and other greener energies. There is clearly political pressure, backed by a vocal public lobby. The risk is that we take our recent experiences, some of them short-term, and attempt to extrapolate without having enough data points. Elsewhere there are a mix of issues and similar questions about future …

Murky waters
When is a complaint not a complaint?

Published 14 October 2021

When is a complaint, not a complaint? It’s a difficult area, with a number of different nuances, as shown in the recent case of Davis v Lloyds Bank PLC. This case is the first that the Court of Appeal had to consider on whether or not a dispute resolution (DISP) complaint has been made. DECIDING WHETHER A CLAIMANT HAS MADE A COMPLAINT WITHIN THE MEANING OF THE FCA’S RULES It is a requirement that firms must follow detailed rules laid down by the Financial Conduct Authority (FCA) as to how and when they must deal with complaints by their customers. The FCA’s DISP rules prescribe how financial institutions must deal with complaints made by their customers. The FCA defines a complaint to be any oral or written expression of dissatisfaction, whether justified or not, from, or on behalf of, any person about the provision of, or failure to provide a financial service which: • alleges that the complainant has suffered (or may suffer) financial loss, material distress or inconvenience; and • relates to an activity of that financial institution, which comes under the jurisdiction of the Financial Ombudsman Service (FOS). In particular, the regulator’s rules require the financial institution to investigate the complaint, and assess fairly, consistently and promptly whether the complaint should be upheld and what remedial action or redress may be appropriate. It then needs to explain its decision to the customer and undertake that remedial action or pay the redress. In this case the Court of Appeal, for the first time, had to consider and decide whether the claimant had in fact made a complaint within the meaning of the FCA’s rules. The Court of Appeal, agreeing with the court of first instance, decided that the claimant had not. WHAT WAS THE DAVIS VS LLOYDS BANK CASE ABOUT? The case arose from the widespread mis-selling of interest rate hedging products (IRHPs) by a number of banks in 2000 and onwards. The banks involved agreed with the FCA to review their sales of IRHPs to unsophisticated customers and, if they considered that those IRHPs had been mis-sold, to pay redress. Mr Davis claimed that he was entitled to bring an action for breach of statutory duty against Lloyds in relation to the second IRHP, not for the original alleged mis-selling (presumably on the basis that such a claim was time-barred), but for the bank’s conduct of the review process. It appears that Mr Davis was advised that case law had already established that the bank’s conduct of the review process was not actionable in either contract or negligence, nor was it subject to the jurisdiction of FOS. Mr Davis sought to argue that his correspondence with Lloyds in relation to the review process amounted to a “complaint” within the meaning of the FCA’s DISP rules and that Lloyds’ failure to consider that complaint in accordance with the IRHP review terms agreed with the FCA, amounted to a breach of statutory duty. That formed the need for the court …

The full measure
Evidencing good customer outcomes

Published 14 October 2021

In its latest drive to support customers in vulnerable circumstances, the Financial Conduct Authority (FCA) wants firms to be able to evidence that vulnerable consumers experience outcomes as good as those for other consumers. The FCA launched their six Treating Customers Fairly (TCF) outcomes back in 2006 and with the new Consumer Duty outcomes on the horizon, the goal for the FCA has never changed. Yet so many businesses fall into the trap of not fully measuring the positive outcomes we all strive to achieve. In the quest to attain and measure good customer outcomes in the consumer lending space, has sufficient time really been spent understanding what ‘good’ looks like for our businesses? Does the Management Information (MI) you are using to measure outcomes give an accurate indicator of whether you are achieving good customer outcomes or have you made the mistake of only measuring business outcomes, performance, or policy/process adherence? These metrics are important but are they enough to ensure vulnerable customers experience outcomes as good as other consumers? Firms need to take a step back and really challenge themselves and agree on a clear view of what any existing or potential customer should be able to expect and what a good outcome would look like for a particular customer journey. This can be for existing journeys and should form a core part of your development process for any new customer initiatives. Different business areas will have different desired outcomes. A good customer outcome at the acquisition stage will be different from a good customer outcome in collections and this is because different actions are being undertaken with different desired outcomes. Think of your desired outcomes as a set of mission statements for each business area. For example, what is your desired outcome for forbearance plans? How about a new applicant of a loan? Is it appropriate to their circumstances? Ask yourself if it is understood and affordable. Think about the FCA’s outcomes, which are relatable to the action you are undertaking. This may seem quite basic but it will keep you true to what you are trying to measure or test. It will also stop you from solely measuring your policy and process adherence and really focusing on whether you are delivering good customer outcomes. Once you have agreed on your desired outcomes, you can then start looking at what is needed to provide oversight. MI is not just about numbers. Data will need to be quantitative and qualitative and some outcome MI will already exist. You will find that there isn’t a need to reinvent the wheel here. The relevant information may already be available in different guises. Your MI will give you oversight and focus on areas that may require further analysis or deeper reviews such as outcome testing. Outcome testing aims to assess all interactions with the customer, communications, documentation, and records. Outcome testing can range from full end to end journey testing to a ‘point in time’ testing approach and will identify potential …

Watching with interest
No interest loans: Workable in reality?

Published 14 October 2021

For years there has been a policy debate about how best to support individuals that cannot afford to borrow from commercial businesses. There will always be a group of people that are considered too risky for commercial businesses to lend to, and the welfare system is designed to support this group. But there remains a discussion about how best to help them access credit to deal with essential or emergency costs. This came into greater focus when many government support schemes were cut following the financial crash in 2008. Since then, subsequent governments have tried to work out how best to support these groups, often taking inspiration from other countries. Most have tried to expand the credit union network and increase membership, but despite millions in government funding, little has been achieved. Members are often required to save before they can borrow. The system also moves slowly compared to the decision making of the commercial sector, not helpful if a car repair is needed quickly to get to work for instance. The current government has decided to focus its attention on a No interest Loan scheme (NILS). A NILS has long been supported by the Treasury, first announced in 2018 by Philip Hammond, the then Chancellor. The aim of the NILS would be to provide a financial cushion for people unable to access or afford existing forms of credit, but who can afford to repay small sums, by offering a way to spread essential or emergency costs. Following mentions of the scheme as various meetings with the Economic Secretary, John Glen MP, in September Fair4All Finance (founded in 2019 to support the financial wellbeing of people in vulnerable circumstances) announced that they had been appointed to deliver a pilot of the scheme. The pilot is designed to test whether this scheme can be scaled to make resources go further to improve financial wellbeing for customers in vulnerable circumstances. It will receive funding from HM Treasury and up to £1m of lending capital from each devolved administration, matched in England by Fair4All Finance. The scheme will kick off with proof-of-concept loans this Autumn, followed by a wider two-year pilot in up to six areas of higher deprivation starting in Autumn 2022. They will work with credit unions, Community Development Finance Institutions (CDFIs) and other regulated lenders, who will be able to apply to administer the loans through a formal procurement process starting in November. The NILS pilot aims to test the benefits to customers, society and the economy and show whether a permanent nationwide NILS can be delivered in a sustainable way. Though the scheme has noble aims, we need to be aware of the limitations and the associated costs. You can lend with no interest, but all lending comes with a price and with a risk. The launch of scheme is something that commercial lenders will be following. The proposed use of existing lenders is noteworthy and will undoubtedly help tackle the administration costs. However, you must consider the funding …

A slow fuse
Informal borrowing – a time bomb in the making?

Published 14 October 2021

Can the harm of financial exclusion ever outweigh the benefits of increased consumer protection? The short answer is: yes. There is no question that regulated lending standards have been raised under the FCA for the benefit of consumers. The non-standard lending sector has been a particular focus in recent years and there has been significant regulatory and structural change in most, if not all of the sector’s product categories. Operators have adapted their business models to cater both for enhanced regulatory requirements and for changes to the way in which existing rules and guidance are now interpreted by both the regulator as well as by the Financial Ombudsman Service. Such changes however have inevitable consequences for the flow of credit, its cost at the point of issue and the returns that can be earned from its issuance. The payday lending, rent-to-own and guarantor loans segments have all but disappeared while home credit has declined significantly. The market leader in each of these sub-sectors has either stopped lending or is in the process of doing so. While detractors might say “quite right” or “good riddance”, we believe that such rhetoric is masking a more worrying trend, one that should be of concern to government, consumer groups and society at large. Unfortunately, it is going unnoticed or worse, is being ignored. Whilst the regulator has confirmed that it has seen no clear evidence that there has been any meaningful increase in illegal lending as a result of its strides to enhance consumer protection, it has acknowledged that there has been a material increase in the level of borrowing from ‘friends and family’. Some may view such informal borrowing as being preferable to paying high interest rates to a regulated lender. However, this kind of borrowing has none of the protections available from a regulated lender and may also in fact represent illegal lending, albeit in a different guise. By increasing the obligations of lenders operating within the regulatory perimeter, it necessarily becomes more difficult for consumers within that perimeter to access the credit that they need. Minimising the risk of harm within the regulatory perimeter is of course a valuable and important objective. However, as the marginal benefits of increased regulation diminish, so the unintended, but inevitable consequences of greater exclusion also need to be taken into account when determining the right balance between protection and financial inclusion. The FCA has already identified that for vulnerable customers in particular, difficulty in accessing services “can lead to disengagement, exclusion, mistrust or even risk of scams as customers may instead rely on informal access methods.” The focus on consumer protection in recent years has also created regulatory uncertainty and complexity and a number of major providers, including Enova, Elevate and Provident Financial have already withdrawn from certain segments of the market . As we emerge from the pandemic, consumers will need access to credit as they seek to manage the peaks and troughs in their income and expenditure. Due to difficulties experienced during the …

Diversity and inclusion
A regulatory issue

Published 14 October 2021

Diversity is by its nature diverse. When the Financial Conduct Authority (FCA) talks about diversity in financial services firms, it is referring to a broad range of backgrounds and characteristics which apply to a firms’ work force and leadership, as well as the customers it serves. Through several speeches and papers published over the last year or so, the FCA has clearly indicated that diversity and inclusion are priority considerations and will remain so in the coming years. WHAT HAS THE FCA SAID? The FCA has been sending strong messages around diversity and inclusion for several years, perhaps most significant in recent months are Nikhil Rathi’s speech in March 2021 and the discussion paper, DP 21/2, published jointly by the FCA, Prudential Regulation Authority and Bank of England. In his speech, Mr Rathi noted the value delivered by having diverse leadership teams and workforces, which, when supported by an inclusive culture, lead to people being able to speak out and challenge “group think”. Empowering people with diverse characteristics and background not only ensures a better working environment, but also enable more effective identification of the needs of customers as well as effective mitigation of risk. These messages were repeated in the regulators’ joint discussion paper DP 21/2. The purpose of the paper is to help regulators understand how they can push the rate of change and improvement in forms around diversity and inclusion. THE ISSUES The issues breakdown into distinct areas of interest: Driving better customer outcomes: The regulators are clear that understanding the diverse needs of consumers using a firm’s services will better enable that firm to deliver fair and appropriate financial services. Key to this is ensuring products meet customers’ needs, perform as expected, including in times of stress, and deliver fair value. Composition of the workforce: Having a diverse workforce which reflects a firm’s target market better enables it to understand customer perspectives and needs. Culture and inclusion: Providing a culture of psychological safety in which people can feel able to speak up and present differing perspectives help to avoid “group think” where a dominant, and potentially harmful, view is reinforced. Leadership: Diversity at board and senior manager level should be pursued with the aim not only of delivering all the positive outcomes referred to above, but also as a means of better managing risk and promoting business success. The regulators are only seeking views on how it might accelerate change at this stage. However, there is a consistency emerging in terms of the areas of regulatory focus. Taking those into account it seems appropriate to: Review your products: Who are your target customers? What are their needs? Are you confident your product is reaching those customers and meeting their needs? How diverse is your workforce? How do your HR and recruitment policies promote the cultivation of diversity? How are you tracking progress in representation and advancement in your business? Leadership: Is your firm’s leadership diverse? Does it reflect your customer base? Does it understand the needs …

Upsetting the apple cart
Debt deferment – CCA/FSMA implications

Published 14 October 2021

DEBT DEFERMENT: CCA/FSMA IMPLICATIONS The Court of Appeal in CFL Finance v Laser Trust (2021) decided that the Consumer Credit Act 1974 (“CCA”) can apply to a settlement agreement, where payment of a debt by an “individual” is deferred, even if the CCA did not apply to the debt prior to the settlement, as in this case, where a loan of £3 million had been made to a company, guaranteed by Mr Gertner. The existence of a debt has to be sufficiently clear for an agreement providing for future payment to constitute “credit” with the CCA. The Court of Appeal did not express a concluded view on where the dividing line lies between a debt (to which the CCA could apply) and a mere claim (to which the CCA could not), as the Court had only heard legal arguments from the debtor (the lender was not represented at the hearing of the appeal). The Court of Appeal decided that: a) the guarantor’s defence was clearly invalid in law and had no real prospect of succeeding; and b) there was a very real possibility that the guarantor did not believe the defence to have even a fair chance of success. For that reason, there was a triable issue as to whether the settlement agreement provided the guarantor with “credit” within the CCA and is at present, unenforceable for non-compliance with one or more sections of the CCA: s.40 (enforcement of agreements made by unlicensed trader), s.61-64 (making the agreement), s.77A (statements to be provided for fixed sum credit agreements) and s.86B (notice of sums in arrears under fixed sum credit agreements). WHEN WILL THE CCA APPLY TO A SETTLEMENT? The CCA will only apply to a settlement agreement if: i) there is a debt; ii) the debt is owed by an “individual” (as defined in the CCA); iii) the debtor has agreed to provide “consideration” (i.e. to pay money or give something of value) in exchange for the creditor’s agreement to accept deferred payment (e.g. make a contribution to the creditor’s legal costs of the dispute). Furthermore, the CCA will not apply if: a) the creditor simply refrained from enforcing its right to immediate payment (i.e. forbearance); or b) the individual recognised the defence to lack “even a fair chance of success” (i.e. no consideration for the settlement); or c) the individual genuinely disputed the creditor’s claim in its entirety on substantial grounds (i.e. no debt and, therefore, no “credit”); or d) the settlement is embodied in a court order (not a schedule to it). ENFORCEMENT If the CCA applies and the settlement agreement does not comply with CCA requirements (e.g. proper execution, periodic statements, notice of arrears), the settlement is unenforceable without an enforcement order, which the court will not grant unless (amongst other things) it considers it just to do so having regard to (amongst other things) the prejudice caused by the contravention in question and the degree of culpability for it. If the lender is not authorised by …

Settling the meaning of credit
CFL Finance Ltd V Gertner

Published 14 October 2021

The Consumer Credit Act 1974 (CCA) defines “credit” as “a cash loan, and any other form of financial accommodation”. That definition is extremely wide, and credit can therefore include (but is certainly not limited to) a loan, a hire purchase agreement, or any other agreement allowing a debtor time to settle their indebtedness in return for some form of consideration (e.g. interest). Until very recently it was considered common ground that terms embodied in a settlement agreement or Tomlin Order, by which parties settle a dispute, are not subject to the CCA. However, the recent Court of Appeal case of CFL Finance Ltd v Gertner raises the possibility that some settlement agreements and/or schedules to Tomlin Orders entered into between funders and individuals might be regulated by the CCA. CFL FINANCE LTD V GERTNER Mr Gertner guaranteed a loan facility provided by CFL Finance (CFL) to another company, who defaulted on the repayment terms. CFL therefore issued proceedings against Mr Gertner, which were compromised by a Tomlin Order. The schedule provided for repayment of the debt, plus interest in the case of a default. Mr Gertner defaulted under the Tomlin Order, and CFL petitioned for his bankruptcy. Mr Gertner defended that petition on the basis that, amongst other things, the Tomlin Order’s schedule provided him with a “form of financial accommodation” and was therefore “credit” under the CCA. As the schedule was not CCA-compliant, Mr Gertner argued that the Tomlin Order was unenforceable as a regulated credit agreement under the CCA. This, he said, was a genuine ground for defending the ongoing bankruptcy petition. In the first instance, the Court dismissed Mr Gertner’s defences, and a bankruptcy order was made. On appeal, however, the bankruptcy petition was dismissed on entirely unrelated grounds. CFL appealed the decision on this unrelated ground, and Mr Gertner cross appealed on his CCA point. Ultimately, following the original appeal being struck out, only Mr Gertner’s CCA argument was considered (unopposed) at the appeal hearing. THE CCA ARGUMENT In Gertner, the Court considered two fundamental questions: does the CCA apply to the schedule to a Tomlin Order; and did a settlement agreement entered into between Mr Gertner and CFL provide Mr Gertner with “credit”? The parties agreed that the CCA does not apply to terms embodied in a Court Order. However, and crucially, whilst Tomlin Orders are approved by the Court the schedules attached to them are not. The Court concluded that the CCA can apply to a Tomlin Order’s schedule because it is ultimately a contract between the parties. The inevitable impact of this decision is that the schedules to Tomlin Orders, and settlement agreements themselves, are at risk of being caught by the CCA. As regards the second question, the Court of Appeal ultimately agreed with Mr Gertner and concluded that challenging whether the Tomlin Order’s schedule was unenforceable for being non CCA-compliant was a genuinely triable issue and therefore not appropriate for use in petitioning a debtor for bankruptcy. IMPACT Although not binding …