FCA to probe payday lenders' debt collection practices
The regulator is to launch a probe into the way payday lenders collect debts and how they communicate with customers in arrears.
The action comes as the Financial Conduct Authority (FCA) takes responsibility for policing the troubled short-term loans sector on 1 April.
Around six out of 10 complaints to the Office of Fair Trading (OFT), which has been regulating the sector, are about how debts are collected; while more than a third of all payday loans (around three and half million loans a year) are repaid late or not at all.
The FCA said it wants to ensure lenders enter into a "discussion about the different options available" when a customer is struggling to repay a loan, rather than "piling on more pressure or simply calling in the debt collectors".
New rules already announced by the FCA mean that, from 1 April, payday lenders must carry out affordability checks on potential customers, limit the number of loan rollovers borrowers can make to two and restrict the number of times a lender can attempt to use a continuous payment authority (CPA) to two as well.
Lenders will have to tell customers how to get free advice about their debts and the FCA will also be able to ban any adverts for payday lenders found to be misleading.
Martin Wheatley, FCA chief executive, explained: "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."
The review will specifically look at how payday lenders communicate with customers in difficulty and how they propose to help them "regain control" of their debt. The regulator also wants to examine whether payday lenders' focus is "truly on the customer – as it should be – or simply oriented towards profit".
From 1 April, the FCA will be visiting the biggest payday lenders, including Wonga, as well as examining their advertising and looking into introducing a cap on the total cost of credit in early-2015.
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.