Payday lenders and other high cost short term lenders will be the subject of an in-depth thematic review into the way they collect debts and manage borrowers in arrears and forbearance, the Financial Conduct Authority (FCA) announced today.
The review will be one of the very first actions the FCA takes as regulator of consumer credit, which begins on 1 April 2014, and reinforces its commitment to protecting consumers – one of its statutory objectives. It is just one part of FCA’s comprehensive and forward looking agenda for tackling poor practice in the high cost short term loan market.
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.”
This area is a priority because six out of ten complaints to the Office of Fair Trading (OFT) are about how debts are collected, and more than a third of all payday loans are repaid late or not at all - that equates to around three and half million loans each year. The new FCA rules should reduce that number, but for those that do fail to make repayments and are keen to get their finances back on track, there will now be a discussion about the different options available rather than piling on more pressure or simply calling in the debt collectors.
The review will look at how high-cost short term lenders treat their customers when they are in difficulty. This will include how they communicate, how they propose to help people regain control of their debt, and how sympathetic they are to each borrower’s individual situation. The FCA will also take a close look at the culture of each firm to see whether the focus is truly on the customer – as it should be - or simply oriented towards profit.
Beyond this review, as part of its regulation of the high cost short term lending sector, from 1 April 2014 the FCA will also:
- Pay a visit to the biggest payday lenders in the UK to analyse their business models and culture;
- Assess the financial promotions of payday and other high cost short term lenders and move quickly to ban any that are misleading and/or downplay the risks of taking out a high cost short term loan;
- Take on a number of investigations from the outgoing consumer credit regulator, the OFT, and consider whether we should begin our own for the worst performing firms;
- Consult on a cap on the total cost of credit for all high cost short term lenders in the summer of 2014, to be implemented in early 2015;
- Continue to engage with the industry to encourage them to create a real-time data sharing system; and
- Maintain regular and ongoing discussions with both consumer and trade organisations to ensure regulation continues to protect consumers in a balanced way.
The FCA’s new rules for payday lenders, confirmed in February, will mean the sector has to carry out proper affordability checks on borrowers before lending. They will also limit to two the number of times a loan can be rolled-over, and the number of times a continuous payment authority can be used to dip into a borrowers account to seek repayment.
Around 50,000 consumer credit firms are expected to come under the FCA’s remit on 1 April, 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.
Payday lenders will be one of the groups that have to seek full FCA authorisation first and it is expected that a quarter will decide that they cannot meet the FCA’s higher consumer protection standards and leave the market. Most of these firms will be the ones that cause the worst consumer detriment.
Notes for editors
- The FCA’s thematic review into the arrears management practices and treatment of borrowers in difficultly by payday lenders will commence on 1 April with an information request to firms. The FCA will then visit a range of firms of all sizes.
- Analysis by the Competition Commission has found that payday lenders currently issue approximately 10.2m loans a year, worth £2.8 billion. The average payday loan is £260, but a quarter of loans are for £100 or less.
- By comparison the entire consumer credit market is worth over £200bn (Bank of England).
- Payday loan borrowers are more likely to be younger compared to the adult population as a whole; the average age of a payday loan borrower is 35. Around 60% are male, but high street borrowers are relatively more likely to be women. They are over twice as likely to be living in private rented accommodation compared with the population as a whole. The median net income of a payday loan customer is broadly similar to that of the general population – around half of borrowers have net household incomes of less than £24,000 a year. On average, high street borrowers have substantially lower incomes than those borrowing from online lenders. Take up of payday loans is higher in localities categorised as having lower incomes and greater levels of deprivation.
- The FCA’s goal is to ensure that providers of consumer credit or related services have sustainable and well-controlled business models, underpinned by a culture based on doing the right thing for their customers.
- On 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA.