Faced with a massive increase in the cost of paying compensation on its upheld complaints, together with the possible costs of an FCA investigation and the far-reaching consequences of the Covid-19 emergency, a guarantor lender admits it is facing very tough times.

A leading guarantor lender has warned it is facing “material uncertainty surrounding going concern” due to the combination of a Financial Conduct Authority investigation, an increase in complaint volumes and the effects of the coronavirus pandemic.

The lender had previously announced that the FCA was investigating its affordability and creditworthiness checking procedures, and that this could lead to at least £35 million in compensation being paid to disadvantaged customers.

Now, the firm’s annual financial results show that the cost of complaints in the 12 months to 31 March 2020 was £126.8m, compared to just £100,000 in the period ending 31 March 2019 – an increase by a factor of 1,268.

Annual revenue increased by 8.7% but the net loan book reduced by 9.1% over the 12 months. The impairment over revenue ratio rose to 38.5% from 23.7%, and the firm said that this was primarily due to the impact of coronavirus.

After making pre-tax profits of £111 million last year, the lender has reported a pre-tax loss of £37.9 million.

For many of the UK’s lenders recently, it has been a case of: if the FCA doesn’t get you, the FOS will.

Some lenders do not conduct a detailed analysis of applicants’ expenditure in each area of spending. Instead, many firms use an estimate of living expenses, obtained from the Office for National Statistics. This ONS figure is merely the average expenditure that would be expected from someone living in the UK with the profile of the applicant in question. Recent FOS judgements clearly show that the independent complaints body does not agree that using ONS data to estimate expenditure is appropriate.

In most of its recent adjudications on guarantor and instalment loans, FOS have concluded that the firm should have conducted a detailed expenditure analysis and verified any expenditure data supplied by the customers by asking to see their bank statements. FOS often decide bank statements are a necessary component of ‘proportionate checks’ even when the loan amount is as low as £1,000 and/or the loan term is as short as 12 months.

Many firms also specialise in lending to consumers with an impaired credit profile, and FOS often concludes that this is another reason not to use ONS data to estimate expenses, as an applicant with a poor credit history is unlikely to be a typical ‘average’ person.

Guarantor lenders’ business models work on the basis that they lend to applicants who would not have been accepted for a loan had they not been supported by a suitable guarantor. However, it is clear that FOS does not believe that this means the checks carried out on the applicant can be any less rigorous than would have been the case had they applied for a non-guarantor loan.

Finally, in some recent adjudications, FOS has been applying a very strict interpretation of CONC 5.2A.36 in the FCA Handbook. This rule reads:

“A firm must not accept an application for credit under a regulated credit agreement where the firm knows or has reasonable cause to suspect that the customer has not been truthful in completing the application in relation to information relevant to the creditworthiness assessment.”

For example, FOS has upheld recent complaints, using this rule as its justification, where the customer’s income on their payslips was lower than they had stated in their application. FOS did not believe it was enough for the firm simply to say that it used the lower of the two income figures in its affordability calculation.

Similarly, FOS has also upheld recent complaints on this basis where the monthly mortgage payment given by the customer in their application was lower than the payment stated in a bank statement or credit report. FOS doesn’t appear to be accepting the argument that the figure supplied by the customer could have been their personal contribution to the mortgage payment.

The FOS uphold rate for guarantor loan complaints in the 2019/20 financial year was 89%, increasing almost threefold from the previous year’s 32%.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article