28 August, 2014
The mis-selling of Payment Protection Insurance and the subsequent millions of claims in compensation was a huge blow to the second charge mortgage industry.
When the Financial Services Authority took the unprecedented move of saying its rules could be applied retrospectively to the selling of policies, the floodgates opened.
The industry has regained its footing since then, but with complaints relating to the sale of secured loans on the up could another mis-selling scandal be brewing?
On the Rise
In 2012 the Financial Ombudsman Service started to record complaints about secured loans as a standalone entity within its figures. Back then it received 151 complaints relating to secured loans in the three months July, August and September of 2012.
Fast forward to the most recent figures and in the three months April, May and June of 2014 it received 241.
Overall it received 1,053 complaints last year compared to 925 in the previous year, equating to around 80-100 complaints each month.
What is more of a concern than the actual rise in complaints though is the number which are being upheld in favour of the consumer. In the last year 39% of complaints were upheld in favour of the consumer, compared to 32% in the previous year and just 21% in 2012.
A spokesman for the FOS tells Loan Introducer: “Secured lending complaints are dealt with in very similar ways to mortgage complaints, for obvious reasons. The high levels of these complaints, like mortgages, are likely to be related to the current economic climate as people find their finances increasingly squeezed.”
He says typical areas of complaint relate to disputes over repossession, the sale and advice which was given when the secured loan was taken out, and problems with the administration of the loan.
Chasing the Claim
Nick Baxter is an independent chairman of the Professional Financial Claims Association, as well as an expert witness and has first-hand experience of complaints relating to second charges and mortgages.
He says: “I have seen cases were unsecured debt was rolled into secured debt and it was right for the consumer but conversely I’ve seen cases where the unsecured debt was rolled into secured debt and it was absolutely wrong for the consumer– it’s not one size fits all.
“With PPI, a huge proportion of the mis-selling was because there was no needs and circumstances analysis undertaken and customers didn’t know they had it. With mortgages (and secured loans) there has been, it’s more a question of whether that was done appropriately and with the relevant skills and care.”
He says there are generally two aspects to a claim – firstly it needs to be assessed whether the advice was appropriate. If it was inappropriate, did the customer suffer a financial loss as a result of the advice?
“It could be that the advice was wrong but because of the way rates have gone, especially LIBOR, the customer may not have been penalised financially by the advice,” he adds.
Claims management firms have been quick to cash in on the mis-selling of PPI and first-charge mortgages, but should the industry be on guard against them in relation to the mis-selling of secured loans?
Steve Walker, managing director of Promise Solutions, says it has not received any complaints directly from claims firms but he suspects they may have been behind a few.
“We have had a couple of complaints from customers that look as though there is some claims management experience behind them,” he says.
Walker has been able to defend the complaints “relatively easily” he says, because of its call recording and record keeping.
One complaint was from a customer who claimed they had not been told their loan was a variable rate (which they had), and another was around affordability and borrowing into retirement.
Robert Sinclair, chief executive of the Association of Finance Brokers, is not necessarily alarmed by the number of complaints to FOS.
He says: “You have to remember that there are a substantial number of loans out there, a lot of them haven’t run off and some lenders have some very large back books.”
But he says: “The uphold rate is my biggest concern and indicates that the industry is not learning from what FOS is telling it.”
Although he goes on to say that FOS has not really focused in on secured loan complaints in the past and has not told the industry a lot about the types of complaints it is receiving. Sinclair says this is most likely because FOS does not see complaints about secured loans as an issue, compared to other mis-sold products.
He adds: “I don’t think the broking community sees many complaints, so it may be related to lenders instead.”
He says the complaints could range from anything relating to how the loan was structured, the fees that were charged, or something more fundamental around affordability.
There have also been a number of scams in the secured loan market lately where false firms have duped members of the public into paying upfront fees for non-existent loans.
This could in some way explain the increase in complaints but would not account for the increase in the number of cases FOS is finding in the consumer’s favour.
How to protect yourself
The PPI scandal and the introduction of a new regulator – the Financial Conduct Authority – will have undoubtedly improved second charge firms’ compliance and record keeping.
The new rules for the sector are yet to be finalised but it is widely believed that they will require firms to have more robust affordability checks in place and carry out a more in-depth analysis of the borrower’s circumstances than was required under the Office for Fair Trading.
However, even firms with the most robust compliance and record keeping can never be sure what might be lurking round the corner.
Walker says in the past most brokers would have discussed with the client whether they could afford the loan and made them aware that interest rates could go up and down, but he questions whether old best practice will be enough.
He says: “Under the new rules loan brokers should be carrying out interest rate buffer tests and a full income affordability assessment, but these rules didn’t really exist under the old regulator.
“The question is, how will old applications be looked at in light of the new rules and regulations – I just hope they don’t read across new rules against old best practice, like they did on PPI.”
Baxter says the tipping point for some could come when interest rates rise.
He says: “If we did have a 1% rise in interest rates I think that would push a lot of people who are just coping over the edge and lead to closer scrutiny of the advice they were given at the time.”
He says what tends to happen is that those in financial difficulty will visit an IFA and it will be them who spot any mis-selling.
He says: “I know a lot of IFAs who people in financial difficulty have gone to visit and it is often them who are saying ‘I wouldn’t have given that advice’ and it is the IFA which is raising a lot of the issues.”
The new conduct rules for the sector will undoubtedly result in firms needing to carry out more substantial affordability checks. While it is impossible to say if the regulator will allow retrospective claims in light of the new rules, it seems highly improbable – but not impossible, given the vast number of first and second charge loans this would apply to.
With an increase in the interest rate looming, those who hit financial difficulties will be looking to go down any avenue they can in order to have their debt reduced or written off. There is a good chance this will lead to a further increase in claims to the Ombudsman and if firms haven’t already, they will need to make sure their record keeping is in check in order to defend any claims.