Ombudsman complaints: Guarantor loans replace PPI

Thousands of Britons are complaining to the Financial Ombudsman Service about being mis-sold unaffordable guarantor loans, new figures reveal, as Payment Protection Insurance was finally dethroned as the most complained about financial product.

Complaints about PPI numbered 6,679, meaning it was not the most complained about product in a three-month period for the first time since 2007, the FOS data shows.

It suggests Britain’s biggest financial mis-selling scandal is finally coming to an end, after an August 2019 deadline for original complaints to be made to banks and other financial firms.

But the latest figures from the ombudsman suggest another mis-selling scandal is set to replace it.

There were 10,321 complaints about guarantor loans, 14 per cent of all complaints submitted, in the final three months of last year, a rise of 3,300 per cent on the roughly 300 made in the same period in 2019.

Almost all of these complaints were about unaffordable lending, the FOS said, or other issues with affordability. It said in many cases it found insufficient checks had been carried out to determine whether a borrower could afford a loan before it was approved. 

And separate figures also published by the ombudsman revealed complaints about Britain’s largest guarantor lender, Amigo Loans, skyrocketed from 317 in the second half of 2019 to 12,854 in the same period last year.

This made it the most complained about financial firm, ahead of Provident Financial with 10,000 and Barclays, one of Britain’s biggest banks, with 8,300.

Guarantor loans offered by the likes of Amigo are aimed at less creditworthy borrowers, are underwritten by family members or friends who agree to pay back the loan if the borrower cannot and charge interest rates of as high as 50 per cent.

Around nine in 10 complaints came from borrowers, rather than guarantors, the ombudsman said.

‘For more than a decade, the Financial Ombudsman Service received an unprecedented number of complaints about PPI. We’re now seeing thousands more complaints about credit’, a spokesperson told This is Money.

Anthony Morrow, co-founder of online financial adviser Open Money, said of the figures: ‘The figures show that people turned away by mainstream lenders and forced to seek alternative forms of debt continue to get the raw end of the deal. 

‘The FCA has clamped down on payday lenders, but the huge growth in complaints around guarantor loans suggest these are the new way for unscrupulous loan companies to prey on the financially vulnerable who need to access extra money quickly.’

In one case from last December, Amigo was found to have mis-sold one of its customers three loans after the ombudsman found they were unaffordable.

‘Miss E’ had taken out four loans totalling £12,250 over a 26-month period which she said she couldn’t afford, including twice taking out new loans to clear previous balances.

Although the ombudsman found Amigo had done its due diligence on the first loan, it said the other three were unaffordable and she was due compensation and interest and should have the fourth and final loan removed from her credit file.

The 8 December decision was said to be a ‘typical complaint’, while nearly nine in 10 complaints against Amigo resolved by the FOS in the second half of last year were upheld, the latest figures showed. Just over 1,000 cases were resolved.

Mr Morrow added: ‘While they can seem like a good idea for those struggling to get credit, guarantor loans can be a very expensive way to borrow money. If you have been refused a standard personal loan because of affordability issues or a poor credit history, taking on a high interest debt can make existing problems worse. 

An Amigo Loans borrower, ‘Miss E’, was found to have been mis-sold 3 out of the 4 loans she was given by the lender, worth a total of £9,750

‘Seeking help from a credit union could be an alternative way to borrow up to £3000. They tend to lend to a wider range of people than mainstream lenders, charge low interest rates and also often offer support with money management to help improve your credit rating.’

The 12,854 new complaints made against Amigo in the second half of last year made up 10 per cent of all complaints made to the ombudsman, while the rate at which it found in complainants’ favour was nearly three times the average uphold rate of 30 per cent.

Other complained about guarantor lenders included Bamboo and George Banco which received 402 and 169 complaints respectively, while a lower percentage of gripes were upheld by the FOS.  

With Amigo’s complaints up from 317 in the second half of 2019 and 1,163 in the first six months of 2020, it is the latest piece of bad news for the increasingly beleaguered lender. 

Britain’s largest guarantor loan provider, once described by Labour MP Stella Creasy as a ‘legal loan shark’, revealed last June that the Financial Conduct Authority was investigating it over its lending practices.

The investigation covered Amigo’s lending from November 2018 onward, when new rules designed to protect borrowers from ‘unaffordable lending’ came into effect.

‘Every week brings more evidence that credit companies are exploiting hard-pressured Britons that are struggling with the cost of the pandemic’, Stella Creasy told This is Money.   

‘It’s not enough that people can go to the FOS, the Government must urgently step and cap the cost of all forms of credit to consumers the protections they need.’

Meanwhile mounting complaints against the company have seen it set aside millions of pounds to deal with the backlog and launch a ‘scheme of arrangement’ in January covering around 1million current and past borrowers and guarantors who may have been mis-sold unaffordable loans as long ago as 2005.

The scheme, which if approved would be funded by a pot of at least £15million, was proposed as Amigo admitted to its borrowers that it didn’t have enough money to pay all compensation claims in full.

It said an additional £20million could be added to the pot plus 15 per cent of pre-tax profits made over the next four years.

It made a pre-tax loss of £81.3million in the nine months to the end of December 2020, its latest accounts revealed, after the cost of dealing with complaints rose from £26.6million to £116million.

The scheme as proposed will go to court at the end of March to determine if it is fair, and will then be voted on by creditors and go to court again for a second hearing. If it is approved the scheme could start in mid-May and payouts could be begin in 2022.

The lender has told borrowers they would be better off in the scheme and voting it down would see the company likely go into insolvency.

But Britain’s financial regulator have refused to give it the green light, while Sara Williams, a debt advisor who runs the blog Debt Camel, suggested borrowers owed money ‘may only get very little compensation’ through the scheme.

Amigo Loans ran up a pre-tax loss of £81.3m in the 9 months to the end of 2020 after it had to set aside £150.9m to cover complaints – a rise of 707% on the year before

‘In the proposed scheme 150,000 current customers will get their balances reduced if their claim is upheld – just like they would if Amigo went into administration’, she said. 

‘Amigo says these balance reductions will cost it about £85million. So the £15million Amigo is offering for refunds for the 700,000 borrowers and guarantors with settled loans, is going to give tiny refund amounts, much less than 10 per cent.’ 

She said it could be as little as 5 per cent, and described the proposal for the loss-making lender to add 15 per cent of its profits over the next four years as ‘jam in a few years, or possibly none at all.’

Amigo Loans said in a statement: ‘Amigo received a high level of complaints in 2020, which is why we launched the scheme of arrangement in January. 

‘We are a new leadership team that want to correct past mistakes in a way that is fair and equitable to all our customers – including our 700,000 past borrowers and guarantors.’