The Financial Conduct Authority (FCA) announced on Wednesday that it will carry out an in-depth thematic review on the methods used by payday lenders and other high cost short term lenders to collect debts and manage borrowers in arrears.
Analysis by the Competition Commission has reportedly found that approximately 10.2m loans worth £2.8bn are issued by payday lenders annually. The average payday loan is £260, but a quarter of loans are for £100 or less.
As part of FCA’s comprehensive and forward looking agenda for tackling poor practice in the high cost short term loan market, the review will be one of the very first actions the FCA takes as regulator of consumer credit.
Beginning 1 April 2014, around 50,000 consumer credit companies are expected to come under the FCA’s remit, of which around 200 will be payday lenders. These companies will initially have an interim permission but will have to seek full FCA authorisation to continue doing credit business longer term. It is expected that a quarter of high cost short term loan firms will be unable to meet the FCA’s higher consumer protection standards and will subsequently leave the market. According to the FCA, most of these firms will be the ones that cause the worst detriment to consumers.
Six out of ten complaints made to the Office of Fair Trading (OFT) are reportedly concerning debt collection. Approximately three and half million loans annually are either repaid late or not at all and the FCA expects that its new regulations will lessen the number of those that fail to make repayments. It will look at various options for those who are keen to get their finances back on track, instead of calling in debt collectors or try to coerce consumers into making repayments.
High-cost short term lenders will be investigated into the way they treat their customers who are in difficulty. The FCA will scrutinise how lenders communicate with their customers and how they propose to help people regain control of their debt. It will also asses how sympathetic lending companies are to each borrower’s individual situation, as well as ensure that the focus is truly on the customer, rather than oriented towards profit.
Martin Wheatley, FCA chief executive, said:
“Our new rules mean that anybody taking out a payday loan will be treated much better than before. But that’s just part of the story; one in three loans go unpaid or are repaid late so we will be looking specifically at how firms treat customers struggling with repayments.
“These are often the people that struggle to make ends meet day to day, so we would expect them to be treated with sensitivity, yet some of the practices we have seen don’t do this.
“There will be no place in an FCA-regulated consumer credit market for payday lenders that only care about making a fast buck.”