FCA to visit and review debt collection practices of payday lenders

Out-Law News | 12 Mar 2014 | 2:19 pm | 2 min. read

The UK's Financial Conduct Authority (FCA) is to conduct an in-depth review of debt collection practices in the payday loans market when it takes on responsibilities for the regulation of the consumer credit market next month.

The regulator said it was a "priority" to review how debt was being collected in the market because 60% of complaints the Office of Fair Trading (OFT) receives at the moment are about practices in this area.

"The review will look at how high-cost short term lenders treat their customers when they are in difficulty," the FCA said. "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."

The OFT is the current regulator of consumer credit providers in the UK but from 1 April the FCA will take on this role and have more powers to intervene in the market.

The regulator said that, in addition to its review, it would visit the largest payday lenders in the market to assess their "business models and culture". It said it would also assess short-term lenders' financial promotions and "move quickly to ban any that are misleading". A consultation will also be held this summer on applying a cap on the total cost of credit that short term lenders can charge, the FCA said.

Consumer credit expert Ian Roberts of Pinsent Masons, the law firm behind Out-Law.com, said: "This review is to be welcomed as it shows the FCA is focused on tackling the real problem in the payday loans market which is the practice of continuing to charge and pursue borrowers who are in financial difficulty. The key principle is that lenders should deal fairly with customers who are in arrears or default."

"The fact there is a review should also increase the pressure on lenders to carry out proper affordability checks, which they are required to do. It also makes a reasonable package when combined with rules that prevent payday lenders using a continuous payment authority (CPA) to seek repayment from a customer's bank account more than twice as well as the limit of two that applies to rolling over of unpaid loans to the next month. I would hope that this review will also reduce the pressure to apply an interest rate cap which could have damaging side effects," he said.

Earlier this month the regulator finalised the initial rules that will apply to the £200 billion consumer credit market, which includes approximately 50,000 firms. All firms and individuals offering overdrafts, credit cards and personal loans, selling goods and services on credit, offering goods for hire or providing debt counselling or debt adjusting services to consumers will fall within the new regulatory regime.

"Our new rules mean that anybody taking out a payday loan will be treated much better than before," Martin Wheatley, FCA chief executive, said. "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," he added.