Consumers struggling to access credit due to pressure from claims companies, warns trade group

Consumers turning to friends and family for loans, which could create huge problems if the economy goes into decline

Consumers are increasingly turning to family and friends for loans as a ramping up of compensation claims has slashed the number of credit companies available, according to the Consumer Credit Trade Association.

The CCTA said claims management companies were to blame for the increased number of claims, and warned consumers are finding it more difficult to access credit from reputable sources.

Payday lender Wonga collapsed last month, driven into administration due to a rapid pile-up of claims for compensation from borrowers who said they were given unaffordable loans.

The company blamed CMCs for a recent surge in compensation requests, which pushed it over the edge.

Greg Stevens, chief executive of the CCTA, said many CMCs were making “vexatious and fraudulent” claims.

According to the Financial Ombudsman Service’s rules, compensation can only be claimed six years from the event the consumer is complaining about, or three years from when the consumer knew, or could reasonably have known, they had cause to complain.

However, Mr Stevens said lenders are being “carpet-bombed by CMCs”, many of which fall outside the six year limit.

In addition, lenders must pay £550 for every complaint taken on the the FOS, regardless of whether the claim is legitimate or not. “It’s not a fair playing field,” he said.

One of the main knock-on effects of a more restricted market has been more people turning to family and friends to borrow money.

This could become hugely problematic, Mr Stevens warned, with interest rates on the rise and prices set to increase: “Friends and family are taking the burden but you don’t know how long they will be able to do so.”

This weekend marks 10 years since the collapse of Lehman Brothers, seen by many as the beginning of the last financial crisis, and Mr Stevens said the UK could be headed for another downturn.

“We might be close to another cycle where we see another recession or mini-recession,” he said.

Meanwhile, he added: “Prices will rise if the Sainsbury’s/Asda deal goes through, and they’re likely to go up because of Brexit. There’s more pressure coming.”

Mr Stevens called for more balance between regulation of the consumer credit market and the CMC industry. “We are just looking for fair play."

Simon Evans, chief executive of the Alliance of Claims Companies, rejected the allegation that CMCs encourage unfounded claims.

“Let me be clear, for CMCs operating with best practice, and all of our members abide by our guiding principles to do so, it makes no economic sense to present spurious or speculative claims for consumers so, clearly, the rise in these claims from consumers via third parties such as our members is being driven by the increased knowledge of the poor and borderline fraudulent lending practices of payday lenders,” he said.

“It is quite disingenuous of payday lenders to point the finger of blame at claims management companies as the fallout from the Wonga collapse continues.”

Mr Evans cited the latest complaints data from the FOS, which showed an increase in claims against payday lenders, with 69 per cent of cases being upheld in favour of consumers.

“What does this tell you? Consumers were treated badly by these companies and, like other financial institutions, they are now paying the price for their previous poor practices. That is not the fault of CMCs, it lies squarely at the management of the companies themselves who must have hoped never to have been brought to account,” he said.