Payday loan firms failing customers in arrears

10 March 2015

Payday lenders are failing to meet their regulatory requirement to treat customers in arrears fairly, according to the Financial Conduct Authority (FCA).

In a review of its first year of regulating the sector, the FCA said it had uncovered "unacceptable practices" from many lenders, including firms failing to recognise when customers were in financial difficulty, firms not directing people to free debt advice when they need it, and offering inflexible repayment options to customers in arrears.

The FCA also found "serious non-compliance and unfair practices" in all firms it surveyed, "leading to poor outcomes for many customers and in some cases, serious detriment and financial loss".

Three firms had a backlog of letters and other documentation which included communication from vulnerable customers who were in serious financial difficulty and had fallen behind with repayments. The firms had also failed to look at medical evidence supplied by customers and letters from debt advisors that provided information about why some customers were unable to pay.

When the FCA investigated further, it found that these vulnerable customers were still being chased by debt collectors - even though firms are required to give customers "breathing space" from debt collectors if they have provided evidence they are working with a debt advisor to manage their debts.

Tracey McDermott, director of supervision and authorisations at the FCA, said: "Our rules are designed to ensure loans are affordable; that customers who get into difficulty are treated fairly and that they are not pressurised into unaffordable and unsustainable repayment plans.

"This segment of the industry has, for too long, been in the spotlight for the wrong reasons. It is essential that the more customer-focused approach we have started to see is maintained and embedded as we go forward.

"The real test for these lenders will be FCA authorisation where they will have to demonstrate exactly how much progress they have made if they want to remain in the market."

The FCA did acknowledge that many firms are beginning to take "a more customer-focused approach" to business, and had taken steps to change their behaviour to meet with their regulatory requirements.

However, its review, which covered 60% of the sector, also found:

  • repayment plans that were clearly unsustainable and subsequently failed.
  • firms not dealing appropriately with issues when things went wrong, for example staff failing to investigate or acknowledge complaints and customers having to explain their situation multiple times as a result of poor record-keeping.
  • firms engaging in misleading practices to seek payment from customers in arrears.
  • systems failures resulting in incorrect balances, fees and charges erroneously added, and in some cases, duplicate payments being taken.

The Financial Ombudsman Service said it has seen a "significant increase" in the number of payday lending complaints brought by customers over the past couple of years. It is now taking on over 70 new cases each month. And finding in the consumers' favour in around two thirds of cases.

Mike O'Connor, chief executive of StepChange Debt Charity, added: "The FCA findings come as little surprise to anyone who has dealt with the fallout of the payday lending industry's bad practices in recent years. For too many payday loan firms the poor treatment of customers has been the basis of their business plan.

"Not only were these firms giving loans to people who could not afford them, they then compounded borrowers' problems by treating them badly when they fell into difficulty. When people experiencing financial problems are treated poorly by their lender it adds stress and anxiety to an already difficult situation and more often than not makes a bad financial situation even worse.

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