There were 5,660 complaints about credit cards from 1 October to 31 December 2023 (Q3 2023/24), according to the most recent figures from the Financial Ombudsman Service (FOS). This represents the highest number of complaints about credit cards received in one quarter, and a 76% increase from the same period in 2022.
Of these, 55% related to unaffordable or irresponsible lending, compared with 20% in the same period the previous year. This will be of concern to the Financial Conduct Authority (FCA), especially in light of the Consumer Duty where all consumer credit firms are required to treat customers fairly and deliver a good outcome for consumers.
On a business-as-usual (BAU) basis, lenders may underestimate the impact that an escalating number of claims can have on their business. This is especially the case when a large number of complaints are received in a short period of time. Each complaint to the FOS generates a case fee of £750 (although the FOS has confirmed in its Plans and Budget 2024/25 this will be reduced to £650). Crucially, the case fee is payable by the firm regardless of outcome, and places considerable financial strain on firms, especially small- to medium-sized lenders.
However, the consequences of claims against a firm are much wider than any case fee and subsequent redress payments that need to be made to the customer. The time and expense involved in onboarding thousands of claims, as well as the training and resource required to adjudicate them, is significant. It places a burden on both liquidity and management time.
For example, Vanquis Banking Group (formerly Provident Financial) issued a profit warning in March 2024. This was driven by a surge in consumer complaints – the majority of which were generated by a single claims management company (CMC). The lender said that profits in 2024 would be materially below previous expectations due to the administrative costs of processing these claims, even though “the vast majority of these claims are not being upheld”.
Almost three-quarters of the credit card and unaffordable lending complaints received by the FOS in Q3 2023/24 were brought by professional representatives, or CMCs. This compares to just a quarter in the same period in 2022/23.
In December 2023 the FOS announced its intention to introduce case fees for CMCs. On 23 May 2024, the FOS issued its consultation, proposing introducing a charge of £250 for each claim submitted by CMCs, reduced to £75 if the case outcome is in favour of the consumer. The intention is to reduce the amount of spurious, duplicate or unfounded claims submitted, as a fee payable per complaint would significantly alter the economics of many CMCs' business models. The consultation closes on 4 July 2024, with the FOS suggesting an implementation deadline of 1 October to introduce charging.
The Consumer Credit Trade Association (CCTA) has confirmed that the industry supports the introduction of the new charge. However, there has been a concern among consumer credit providers that the lead-time of implementation might lead to a surge in complaints submitted before fees are introduced. The rise in complaints to the FOS for the quarter ended 31 December 2023 would illustrate this, and credit card operators should prepare for continued high levels of complaints from CMCs over the coming months, until the 1 October deadline, or such time as any charge is introduced.
As well as managing the increased costs of complaints, credit card operators are also dealing with a rise in default rates.
Data from FICO shows that the number of customers missing one, two and three payments has been trending upwards since April 2022. In February 2024 they were 5.5%, 3.6% and 2.2% higher year-on-year respectively.
This is backed up by the Bank of England’s latest credit conditions survey which shows that default rates for both credit cards and mortgages increased in Q1 2024, and are expected to have risen again in Q2. Given that lower income consumers often don't have mortgages and may not qualify for a credit card, this illustrates that the legacy of two years of high inflation continues to impact middle income consumers.
Lenders should revisit their forecasts to understand the impact of both an increase in consumer complaints combined with increasing default rates, and any consequences this may have on their cash flow and liquidity position in the short to medium term. Forecasting models should be used to stress-test a firm’s resilience in different scenarios to provide greater clarity on triggers that may lead to underperformance.
Are lenders' affordability assessment processes robust enough to withstand complaints about irresponsible lending practices? Particular attention should be given to where consumers have multiple credit cards from the same lender. For example, the consumer website Debt Camel advises customers that having two credit cards can make it easier to complain about the second card – especially if a customer was only making minimum payments on the first card.
An increase in consumer complaints and rise in associated liabilities can impact investor interest – especially if unfair lending practices are identified by the regulator. Any forecasts should consider the effect that increased complaints may have on any debt or equity raises a lender may be planning, both in terms of price and availability.
Lenders should consider updating their operational resilience and wind-down planning documentation to account for an increased level of consumer complaints, and whether any trigger points need to be reassessed.
In light of increased credit card complaints, lenders must be prepared for greater scrutiny from the FCA. They need to be able to demonstrate that they're complying with the Consumer Duty and ensuring good outcomes for all their consumers – particularly around assessing affordability and providing additional support where needed.
For more information and advice, contact Chris Laverty.
