Mis-selling is all over the news, with PPI at the forefront. But Mike Dailly, principal solicitor at the Govan Law Centre, who is also on the Financial Services Authority's consumer panel, thinks payday and secured loans could be next on the hit list...
With around £9bn of payment protection insurance (PPI) mis-sold to people across the UK, mis-selling is expensive news. But there could be even more around the corner.
The common thread in PPI was fairness, or the lack of it. But what about other products? Super-expensive payday loans can be bought in the time it takes to make a cup of tea. And don't forget the secured loan market, which resembles 'the good, the bad and the ugly'.
Have these been mis-sold on a big scale? My answer would be yes. But how can people stuck with these loans get redress?
The gateway for consumer PPI redress was the Financial Services Authority's focus on the principles of how a firm should act, as opposed to hard and fast rules susceptible to contractual loop holes. More of an art than a science.
Remember the Office of Fair Trading's (OFT) failed challenge to bank charges? It lost on a narrow bit of the Unfair Terms in Consumer Contract Regulations.
Because the banks were able to establish charges were a contractual fee for a package of services, the regulations didn't bite.
Contrast this result with mis-sold PPI, where lenders' clever arguments didn't wash because of the FSA's change of approach.
How this applies to other loans
Consumer credit is regulated by the OFT under the Consumer Credit Act (CCA). Changes from April 2007 effectively introduced a 'principle-based' approach to consumer credit in relation to treating customers fairly.
Could these changes open the door for consumers to get redress when credit is mis-sold? They certainly could.
The 'unfair relationships test' in the CCA requires a customer's credit agreement and the way it is enforced to be fair.
But it also covers anything done or not done by the lender before or after the agreement is made. There's also no definition of "unfair" in the CCA, so fairness is construed widely.
What might this mean? Here's a typical example.
The Smiths are sold a second secured loan by a finance company. The interest was 11% over 10 years, and Mr Smith was 63 and Mrs Smith 65 at the time.
Two years on, they have retired, their income has dropped and they can't pay the loan. Now, Mr Smith is 67 and Mrs Smith is 69 and they have only been able to afford part of the payments. Repossession is looming.
Were the Smiths mis-sold? They might argue:
- Any creditor selling a loan should exercise reasonable care. They should assess whether a customer can afford to keep their payments up throughout the lifetime of the loan.
- As retirement was imminent, the company should have acknowledged the Smiths would struggle to pay the loan back once their income dropped. It should have advised them the product was unsuitable, and likely to result in repossession.
Now let's take a second example. Judy has a full-time job but can't access affordable credit.
She takes out a payday loan for car repairs. She does this online and it's approved in 15 minutes.
The lending criteria was some form of employment. She borrows £100 for one month at a cost of £42.96. She is again short of cash and is offered a 'roll-over' to the next month with an extra charge.
She keeps rolling over the loan and is liable to pay £400 back in total.
What could Judy argue?
- There was no proper affordability check as the online payday lending took place instantly.
- No fair assessment was given of the suitability of the loan and the consequences of not settling within the contractual term.
- Instantly selling a very high APR payday loan, without a cooling-off period, took advantage of a vulnerable consumer.
What can I do about it?
To get redress under the Consumer Credit Act, consumers can go to court. The court has wide powers where it considers a relationship to be unfair, including altering the terms of the agreement and reducing any sum payable under the agreement. But most consumers won't have the time, money or energy to go to court.
So now the Financial Ombudsman Service, an independent adjudicator, can deal with such consumer credit complaints.
It determines complaints on the basis of what is "fair and reasonable in all the circumstances of the case", making it perfectly placed to deal with payday and secured loans. This could be a more accessible form of redress for borrowers who think they've been wronged.
Should lenders' alarm bells be ringing? I think so.
Views expressed do not necessarily reflect those of MoneySavingExpert.com.
Please let us know in the discussion below if you successfully argue you were mis-sold a payday or secured loan.