At the height of the payday lending boom, the Financial Ombudsman Service (FOS) played a critical role in cleaning up the market. At a time when some lenders prioritised volume over responsibility, the Ombudsman provided consumers with a powerful route to challenge poor lending decisions.
The impact was significant. Complaints surged, fuelled in part by widespread media coverage and consumer awareness campaigns led by figures such as Martin Lewis. For many borrowers, this was long overdue. The system worked: irresponsible lenders were held to account and, in many cases, removed from the market altogether.
However, this came at a cost. A number of well-known lenders, including Wonga and QuickQuid, ultimately entered administration. While multiple factors contributed, the volume of complaints and the associated case handling fees created a financial burden that many could not sustain. The result was a necessary, if painful, reset of the industry.
Fast forward to today, and the landscape is almost unrecognisable. The market has contracted significantly, by some estimates over 90%, leaving behind a much smaller, more tightly regulated group of lenders.
In many ways, this is a success story. Standards are higher, affordability checks are more robust, and the reckless practices of the past have largely been eliminated. But as is often the case with regulation, the pendulum does not always settle neatly in the middle. This raises an important question: has it swung too far?
The reality we face today is that full regulatory compliance does not eliminate the substantial cost of managing complaints. Operating at scale introduces real challenges, particularly when the economics of complaint resolution are misaligned with the value of the products involved.
A customer applies for a £500 loan. All affordability checks are completed, including income and expenditure assessments, supported by credit bureau data and Open Banking insights. The customer confirms that they can manage the loan responsibly.
A month later, the customer submits a complaint, claiming the loan should never have been issued. They request that the balance be written off and threaten escalation to the Financial Ombudsman if the firm does not comply.
Option A: Defend the complaint. Stand by the decision, supported by evidence that all proportionate and regulatory checks were carried out in line with FCA guidance, and be prepared to defend the case through the Ombudsman process.
Option B: Uphold the complaint. Write off the balance to avoid the time, cost, and resource required to defend the case.
Here is the uncomfortable reality: from a purely commercial perspective, the £650 FOS case handling fee can exceed the value of the loan itself. That creates a structural incentive to settle regardless of the merits, and that incentive exists entirely by design of the current fee model, not because of any failing on the lender’s part.
This is where the system begins to feel misaligned.
While this issue exists across financial services, short-term lenders are uniquely exposed. Lower loan values combined with high application volumes create a very different economic model. The cost of defending even low-merit complaints can quickly exceed the value of the loan itself.
As a result, redress is often paid not because a complaint has merit, but because the fee structure makes defence commercially irrational. That is not a healthy outcome for anyone, including consumers, who are best served by a complaints system that is taken seriously rather than navigated around.
This dynamic has intensified since 2024, when the FOS reduced the number of free cases to just three per year. For high-volume lenders, the financial impact has been both immediate and disproportionate.
The consequences are clear: higher barriers to entry at a time when margins are already thin, reduced innovation, and weakening competition. The market risks becoming increasingly concentrated.
Ironically, this cuts both ways. On one hand, lenders like Fast Loan UK absorb significant redress costs, fair or otherwise. On the other, the same pressures deter new entrants and future competitors, offering a degree of protection to established players. But stepping back, that is not a trade-off anyone should be comfortable with.
From where I stand, this appears to be another example of well-intentioned policy creating unintended consequences, without a clear long-term view of market health, competition, or sustainability.
There is no single fix, but there are practical steps that could help rebalance the system and better align outcomes for both consumers and lenders.
If it were up to me, I would start with the following:
Introduce a tiered fee structure based on the size of the loan and the total value of interest and fees paid by the customer over the lifetime of the lending relationship.
This would better align case handling costs with the underlying economics of the product, while removing the perverse incentive to settle low-value complaints purely on commercial grounds.
Where a lender successfully defends a complaint, the case fee should be fully refunded. Conversely, where a complaint is upheld, a higher fee than the current standard could apply.
This approach would encourage robust and fair defence of complaints, rather than early settlement driven by cost considerations. It would also reinforce the importance of maintaining high compliance standards across the industry.
Ultimately, regulation should protect consumers, but it must also remain commercially rational. Otherwise, we risk solving yesterday’s problems while quietly creating tomorrow’s..
