What counts as unfair lending
Unfair lending is the term used by the Financial Ombudsman Service and the courts to describe lending decisions that breached the lender's regulatory or legal obligations. The most common form is irresponsible lending, where the lender agreed to a loan or credit facility without adequate checks on the borrower's ability to repay. Other forms include unfair contract terms, misleading promotion, the failure to act on signs of financial difficulty and undisclosed commission arrangements.
The legal foundation sits in three places. The FCA's Consumer Credit Sourcebook (CONC), particularly CONC 5.2A on creditworthiness, sets out the affordability and credit-risk checks lenders must carry out. The Consumer Credit Act 1974, particularly sections 140A to 140D, allows the courts to find an "unfair relationship" between borrower and lender and grant remedies including refund of charges, variation of the agreement and removal of the debt. The Consumer Duty from 31 July 2023 adds a further layer requiring firms to deliver good outcomes for retail customers.
A loan can be technically legal under the agreement and still be unfair lending if the affordability checks were inadequate or the relationship was unfair under the Consumer Credit Act.
The legal threshold
Unfair lending claims arise across the full range of consumer credit products: payday loans, instalment loans, credit cards, store cards, catalogue accounts, overdrafts, motor finance, guarantor loans and home credit. The common thread is that the lender either failed to check the borrower could afford the credit, increased the borrower's indebtedness without proper assessment or imposed terms or charges that were unfair in the circumstances.
Before relying on the FOS, FSCS and Consumer Duty protections set out below, confirm the lender is FCA-authorised. Our guide on verifying FCA authorisation explains how to check. Where the lender is unauthorised, the loan agreement may itself be unenforceable. A different route applies (see our guide on loan sharks and unauthorised lenders).
The standard remedy
The principle behind FOS and court awards in unfair lending cases is restitution. The borrower is put back in the position they would have been in if the unfair lending had not taken place. This produces a remedy that follows a consistent pattern across most cases, although the precise amounts depend on the facts.
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Refund of all interest and charges
Every penny of interest, late-payment fees, default charges and other amounts the lender added to the original sum borrowed is refunded. This is the largest component of most awards. On a payday loan that was rolled over multiple times, the refund can substantially exceed the principal.
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Compensatory interest on the refund
Interest is added to the refunded amount from the date each charge was taken. The rate is now Bank of England base rate plus 1 per cent for awards calculated from 1 January 2026 onwards (the previous rate was 8 per cent simple). The interest reflects the loss of use of the money during the period the lender held it.
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Recalculation of any outstanding balance
Where the borrower still owes money to the lender, the balance is recalculated as if no interest or charges had ever been added. The borrower remains liable for the original capital, but the inflated balance the lender claimed is reduced to the bare amount actually borrowed and not yet repaid.
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Removal of negative credit-file markers
Defaults, late-payment markers, county court judgments arising from the unfair lending and any other negative entries connected to the agreement are removed from the borrower's credit file. The lender is required to instruct all three credit reference agencies to make the corrections.
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Compensation for distress and inconvenience where appropriate
Where the unfair lending caused additional distress or inconvenience beyond the financial loss, the FOS may direct an additional payment. Typical amounts range from £100 to £750. Higher figures are awarded in cases of significant distress or where the lender's conduct was particularly poor.
HMRC treats the interest portion as taxable income
The interest element of the refund is taxable as savings income. Basic-rate taxpayers pay 20 per cent on the interest portion above the personal savings allowance (currently £1,000 for basic-rate taxpayers, £500 for higher-rate). The principal refund is not taxable. Most lenders deduct the basic rate at source and provide a statement showing the gross and net amounts; higher-rate taxpayers must declare the income on their tax return.
How a typical award is calculated
The mechanics of the calculation are straightforward but important to understand. The example below uses simplified numbers to illustrate the approach. Real cases involve more complex schedules of payments, but the structure is the same.
Payday loan refund: £400 borrowed, £640 repaid
A borrower took out a £400 payday loan in March 2023. Through interest and a single rollover, they repaid £640 across four payments between April and June 2023. The FOS upholds the complaint in early 2026 on the grounds that the lender failed to assess affordability before agreeing to the rollover.
Step 1, Refund of interest and charges: £640 paid minus £400 borrowed = £240 in interest and charges, all of which is refunded.
Step 2, Compensatory interest: Interest at BoE base rate plus 1 per cent (averaged across the period from each payment to the date of refund) is added. For roughly three years at an average rate of around 5 per cent, this adds approximately £36 to the £240.
Step 3, Credit-file correction: Any default markers or late-payment entries linked to the loan are removed from all three credit reference agencies.
Step 4, Tax: The £36 interest portion is taxable as savings income. Most lenders deduct 20 per cent at source, leaving the borrower with around £29 net of tax on the interest portion.
Total received: £240 plus approximately £29 net interest = around £269, plus full credit-file correction.
The figures scale up considerably for larger loans, longer periods and cases involving multiple loans from the same lender. A successful claim against a payday lender that issued ten rolled-over loans over two years can produce a refund of several thousand pounds, plus removal of all related credit-file markers.
The evidence that wins cases
Unfair lending complaints succeed where the borrower can show that the lender failed to take steps a reasonable lender would have taken. The evidence required is mostly within the borrower's own records and credit file, with the lender's records becoming available during the FOS investigation.
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Bank statements covering the period before the loan
Three months of bank statements before the loan was agreed are the most important single piece of evidence. They show actual income, actual expenditure and actual financial position. Where these statements show the borrower could not afford the loan but the lender did not request them, the case for inadequate affordability checking is strong.
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Statutory copy of the credit agreement and statement of account
Sections 77 and 78 of the Consumer Credit Act 1974 entitle the borrower to request a copy of the credit agreement and a statement of account from the lender for a £1 fee. The lender must comply within 12 working days. The agreement and statement together set out the precise schedule of charges that will be refunded.
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Statutory copy of the credit file from all three agencies
Every borrower has a free statutory right to a copy of their credit file from Experian, Equifax and TransUnion. The credit file shows what information was visible to the lender at the time of the application. It also shows what negative entries are now linked to the loan.
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A pattern of borrowing from multiple lenders
Where the borrower was simultaneously holding loans from several other lenders, the case for inadequate affordability checking is strengthened. A reasonable creditworthiness assessment would have detected this pattern. Bank statements showing payments to multiple lenders are particularly powerful evidence.
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Evidence of vulnerable circumstances
Where the borrower was in vulnerable circumstances at the time of the loan (illness, bereavement, addiction, low income, financial difficulty), this strengthens the case both under CONC affordability rules and under the Consumer Duty's vulnerability requirements. Medical records, GP letters, debt charity correspondence and benefit award letters all support this argument.
The complaint process step by step
The process is the same for almost all unfair lending complaints. It runs from the lender's complaints procedure to the Financial Ombudsman Service, with court action available as a final option but rarely necessary for amounts within the FOS limit.
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Gather the evidence
Bank statements, credit-file copies, the credit agreement (request a copy under sections 77 to 78A of the Consumer Credit Act 1974), statements of account and any correspondence with the lender. Most of this can be assembled in a few hours over a weekend.
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Write the complaint to the lender
The complaint should be in writing, dated, sent to the lender's complaints address and set out the basis on which the lending was unfair (typically inadequate affordability checks under CONC 5.2A and the Consumer Duty), the harm caused and the remedy sought. Keep a copy and proof of posting.
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Wait for the lender's final response or 8 weeks
The lender has 8 weeks to issue a final response. The response will normally either accept the complaint and offer a settlement or reject the complaint with reasons. Where the offer is acceptable, the matter ends. Where the response is unsatisfactory or absent, the matter goes to the FOS.
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Refer the complaint to the Financial Ombudsman Service
Within 6 months of the lender's final response, refer the complaint to the Financial Ombudsman Service. The FOS will request the lender's file, examine the evidence and reach an initial assessment. The full process typically takes 90 days but can be longer for complex cases.
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Accept the final decision or pursue court action
If the consumer accepts the FOS final decision, it is binding on the lender. If the consumer rejects the decision, the FOS's involvement ends and court action remains available. Most successful unfair lending claims settle at the lender or FOS stage without proceeding to court.
Time limits
The same time limits apply to unfair lending complaints as to other FOS complaints. The basic position is six years from the event or three years from awareness, whichever is later. In unfair lending cases, the start point of these periods can be more flexible than in some other contexts.
| Limit | Deadline | Application in unfair lending |
|---|---|---|
| Six-year rule | 6 years from event | Usually counted from each individual loan or charge, not from the start of the lending relationship |
| Three-year rule | 3 years from awareness | Often interpreted generously where the borrower could not reasonably have known until media coverage or advice |
| Six-month rule | 6 months from final response | Strict deadline once the lender has issued a final response letter that mentions the FOS |
| Lender insolvency | Separate FSCS deadline | Where the lender has failed, the claim goes to the FSCS instead, with its own deadlines |
Where lending was very old, the three-year awareness rule can sometimes preserve a claim that the six-year rule would otherwise rule out. The FOS has accepted that consumers may not have understood the unfairness of historic lending until the issue received public attention; this can extend the practical deadline. A borrower considering a complaint about lending more than six years old should still try, even where the time limits look uncertain.
Where the lender has failed
Some unfair lending claims arise from lenders that have since gone out of business. The largest UK payday lenders, including Wonga, QuickQuid and Sunny, all entered administration after large volumes of unfair lending complaints. Where the original lender has failed, the route changes from the FOS to the Financial Services Compensation Scheme (FSCS) or the administrator of the failed firm.
The FSCS protects consumers against authorised firms that have failed and cannot meet their obligations. The current limit is £85,000 per person per firm for most claims. In the year ended 31 March 2025, the FSCS paid out £327 million across 32,634 customers. Claims against failed lenders can be made directly to the FSCS through its own free claims process. There is no need for a claims management company.
The FSCS is free and direct claims succeed
Claims management companies actively target customers of failed lenders and offer to "manage" FSCS claims for a fee. This is unnecessary. The FSCS has a straightforward online claim form, dedicated case handlers and a free phone line. Claims management companies add no value to FSCS claims and the fee they charge (typically 25 to 40 per cent of the award) significantly reduces the consumer's recovery.
Where the failed lender is being administered rather than fully wound up, the route may instead be a claim against the administrator. The administrator will publish a deadline by which claims must be submitted and the form they should take. Missing the administrator's deadline can mean the claim is excluded from any distribution of the failed firm's assets.
Motor finance: a special case
Motor finance commission claims are now handled under a dedicated FCA-mandated redress scheme. The scheme was finalised in policy statement PS26/3 on 30 March 2026 following the Supreme Court's decision in Johnson v FirstRand Bank in August 2025. It covers motor finance agreements entered into between 6 April 2007 and 1 November 2024 where commission was paid to a broker without adequate disclosure to the consumer.
| Item | Figure | Notes |
|---|---|---|
| Total redress estimated | £7.5 billion | Across the scheme period 2007 to 2024 |
| Eligible agreements | ~12.1 million | Both Scheme 1 (2007 to 2014) and Scheme 2 (2014 to 2024) |
| Average redress per agreement | ~£830 | Higher for cases similar to Johnson; lower for hybrid remedy |
| Implementation deadlines | 30 June 2026 / 31 August 2026 | Lenders must contact eligible customers |
| Final claim deadline | 31 August 2027 | For consumers not contacted by lenders |
Consumers who took out motor finance during the scheme period and were not given clear information about commission paid to the broker may be eligible. There are two categories. Cases similar to the Supreme Court's Johnson decision (involving an undisclosed contractual tie or discretionary commission arrangement, plus very high commission of at least 50 per cent of the total cost of credit and 22.5 per cent of the loan) receive the "Johnson remedy" of all commission plus interest. All other eligible cases receive the "hybrid remedy", which is the average of estimated loss and commission paid plus interest.
Lenders are required to identify and contact eligible customers within the implementation period. Consumers who believe they may have a claim do not need to act in advance; the lender will write to them. Consumers can also make a claim directly to the lender at any point before 31 August 2027. As with FSCS claims, no claims management company is needed.