Ethics of Lending & Borrowing when your Benefits stop

‘I had no clue why my universal credit claim was closed. I have not told DWP that my circumstances have changed.  I had taken out a loan for £5000 whilst I made an appeal against the decision of the DWP; otherwise, I won’t be able to pay my rent.’ 

Mila’s situation raises a number of questions in terms of whether her Universal Credit claim should have been stopped by the Department of Work & Pensions (DWP), or if she should have obtained the loan in the first place to pay her rent or that the appropriate loan company should have even given Mila the loan.  When I spoke to Mila though, her survival instinct drove her to make the application for the loan. If she had taken it out unethically, that no doubt raises more questions.

The Welfare Reform Act 2012 introduced a number of changes in the benefit system. One of these changes was the introduction of Universal Credit. Instead of making a number of claims for means tested benefits - such as support for housing cost and personal allowance; claimants would receive one payment per month, a claim to be make online. Mila was a low income worker who worked consistent hours but her income was not enough to cover her rent as a housing association tenant in a gentrified borough of Hackney. A top up from Universal Credit was a way she managed her finances. When her account was closed, the first thing in her mind was to find a way to challenge the DWP.

The legal process for Mila to make this challenge is to go through a Mandatory Reconsideration process, whereby a decision made by its representative is subject to an appeal. If Mila is unsuccessful with this process, she may have to bring a claim to the First Tier Social Security Tribunal. If the decision of the Tribunal is unsatisfactory for Mila, she may have to request for a ‘Statement of Reason’ within a month and then decide whether to make an appeal to the Upper Tribunal. Legal Aid is only available to her if she considers appealing to the Upper Tribunal. 

If a delay occurs in making the Mandatory Reconsideration decision to cause her financial hardship then, according to Child Poverty Action: ‘a ‘quick win’ is possible in cases of poor decision making and delay in public bodies making a decision.’

A threat of Judicial Review may accelerate the decision-making process by the DWP.  It states that pre-action stage is cost free:

‘It just takes [into account] the time of you writing the Pre-action letter. If the decision is not changed at the Pre-action stage… with their claim [they] will have lost nothing. If your client wants to proceed with their claim, legal aid is available for Judicial Review.’

There is also an issue with Mila when it comes to the ethics by which she obtained the loan.  If she obtained the loan by providing false information she may be committing fraud.  The lender would have to take Mila to the County Court and recover the money under civil fraud claim. In my professional experience, a lender rarely takes this step to recover the money. It may just bring a claim for the debt owed. 

In terms of criminal fraud, however, Mila would be prosecuted by the Crown Prosecution Service (CPS) in England. If she was prosecuted in the criminal court and found guilty, she could be imprisoned and/or fined for obtaining the money dishonestly.

Although the focus has been on Mila’s actions and intentions to obtain the loan, what responsibilities lie with the lender? According to the Financial Conduct Authority (FCA) - the firm must undertake a creditworthiness assessment in accordance to its rules and take into account due regard to the outcome of that assessment in respect of affordability risk, in order for the lender to be a responsible lender. 

Naturally, without knowing the full facts of Mila’s case, it’s difficult to know if the lender has fully complied with the FCA’s rules. Also, did the lender request for   evidence of Mila’s actual income? Aside however, the real question for me is: what steps has the creditor taken to show that it would able to recover the loan from Mila?

Mila may default in paying her loan. If she does, what debt option will Mila have to resolve her problems? What can the lender do when Mila defaults in paying her loan?  According to the FCA:  ‘When dealing with customers in default or in arrears, a firm should pay due regard to its obligations under Principle 6 (Customers’ interests) to treat its customers fairly.’ 

If the suspicion is that the lender broke the rules, Mila may argue that it had lent her the loan irresponsibly. If this is the case, she may initially want to make a complaint to the company concerned. If she does not get adequate remedy from the company, she could make a complaint to the Financial Ombudsman Service (FOS). The FOS would then investigate Mila’s complaint and investigate the actions of both Mila and the lender. This is what the HOS has to say if there is a case for irresponsible lending:

‘Our general approach is that the customer should be put back in the position they would have been in if the problem hadn’t happened. We may also ask you to compensate them for any distress or inconvenience they’ve experienced as a result of the problem.’  

Still, it would be too early for me to jump to a conclusion on Mila’s case. It was clear to me that Mila’s struggle for survival made her obtain the loan. When ethics is involved, however, it raises a number of other questions - fairness needs to be at the heart of the process either when she is borrowing or when the lender is lending.  It will be interesting to see the outcome of the appeal process, when it comes to the DWP’s position, since for Mila, her problems started once her benefit stopped.