By Mark Fairlie

Concerns have been raised that lenders ‘aren’t doing enough to ensure people’s borrowing is sustainable’ in a new report from the Financial Ombudsman Service (FOS).

The FOS study revealed complaints from borrowers increased 64% in the last year, with the ombudsman upholding more than six in ten new complaints made about payday loans; suggesting these customers were not being treated fairly by their lenders.

Consumer credit becoming increasingly common

The overall number of complaints the Financial Ombudsman receive regarding consumer credit appears to be consistently on the rise. In the past tax year, these complaints rose by 40%, following a rise of 89% in the previous year.

These figures have also been attributed to the rising number of people taking out loans to cover everyday costs of living. Debt charity StepChange has estimated that more than seven million low-income households relied on high-cost credit to make ends meet in 2017 alone.

The Bank of England also recently reported that consumer credit had jumped in April by £1.8billion in one month; considerably higher the six month average of £1.3billion.

Chief ombudsman Caroline Wayman told the BBC that

“people buy a whole range of things on credit – from everyday household appliances to a car – and in many cases, it is manageable and affordable.”

“For some people, borrowing may be a necessity rather than a choice. There can be a very fine line between getting by and going under. Even people who seem to be on top of their finances can quickly become vulnerable.”

As the number of people taking out payday loans, store cards and other forms of credit increases, the Ombudsman have suggested that many lenders “aren’t responding constructively to their customers’ concerns”; causing complaints to rise by 40% in twelve months.

Six in ten borrowers treated unfairly

Looking at high-cost credit, payday loans were found to account for more than 17,000 complaints received by the Financial Ombudsman Service in 2017/18.

The job of the Ombudsman is to review the case to decide whether or not the borrower was really treated unfairly by their lender. For example, if the borrower realised they were unable to repay their loan by the agreed deadline but informed the lender as soon as possible to arrange an affordable repayment plan before the due date.

If the lender were to reject this proposal and continued to add interest and late fees to the total cost, then the case would be passed to the Ombudsman to decide whether or not the borrower took substantial steps to get in touch before the payment became overdue.

In six out of ten cases last year, the Ombudsman chose to uphold borrowers’ claims. Lenders should carry out affordability checks before granting a loan to ensure the borrower is capable of repaying the loan without causing themselves further financial hardship.

The FOS report pointed out that it is not always the case that an individual could not afford to borrow money in the first place, but “lenders still have a way to go in doing the right thing – both at the point they’re deciding to lend money, and at the point their customers complain” in order to protect borrowers at their most vulnerable.

More sustainable and fair lending required

The chief executive of the Financial Conduct Authority (FCA), Andrew Bailey, said in a speech earlier this month that “many people benefit from having access to credit on affordable terms” and that the FCA has already been active in seeking ways to “reform and to tackle harm that has built up”.

Back in 2014, the FCA introduced price caps on payday loans to ensure all interest, fees and charges never exceed 100% of the amount borrowed; also limiting interest and fees to no more than 0.8% per day of the amount borrowed, with default fees being capped at £15.

“What we can say, is that most customers borrow without any problem. Changes in recent years mean that people are paying less to borrow, they are less likely to attract additional fees and costs are capped,”

added chief executive of the Consumer Finance Association, Jason Wassell.