The city regulator has ordered payday lenders to advance compensation for clients who have had badly sold loans, even if it threatens the business with bankruptcy.
In firm letters to companies in the high-cost short-term credit market, Jonathan Davidson, director of supervision at the Financial conduct authority (FCA), outline how businesses should respond to a recent increase in complaints about unaffordable loans.
It follows the August collapse of Wonga, the payday lender who became famous for its sky-high interest rates and was a symbol of the UK household debt crisis. Wonga was brought down by new rules reducing the amount of interest he could charge, and was eventually put under administration by a slew of claims for past abuse sales.
The new regulatory crackdown is likely to put additional pressure on the remaining players in the payday lending market, led by QuickQuid, Sunny and Peachy.
The FCA said payday lenders must consider the “severity of consumer harm that may have resulted” from loans made in the past, and determine whether they should begin a “repair or remediation exercise, which may include contact with customers who have not complained “.
Payday lenders are facing a new wave of claims from claims handling companies, which have raked in old loans taken by consumers.
The letter from the FCA makes it clear that lenders must take complaints seriously and notify the regulator if the subsequent repair bill is likely to send them into bankruptcy. “Companies must take swift action to notify the FCA if they are not (now or in the future) unable to meet their financial commitments due to remediation costs,” Davidson wrote.
Payday loans have long been condemned by activists as a “legal loan shark” that targets vulnerable customers with small loans that can quickly get out of hand. At one point, Wonga clients faced interest rates of up to 5,853%, before being capped by ministers in 2015 at around 1,500%.
Davidson said lenders must heed a series of recent financial mediator judgments in which compensation was awarded to former clients.
He said simply responding to ad hoc complaints was not enough. If the client’s complaint revealed prevalent practices at the payday lender at the time, the company needed to do a more in-depth analysis.
He said businesses need to quickly comply with decisions made by the mediator.
A spokesperson for the Consumer Finance Association, which represents payday lenders such as QuickQuid, said: “There have been a growing number of complaints against short-term lenders, much of which is due to the involvement complaints management companies. This sparked discussions between the lenders, the Financial Ombudsman Service and the Financial Conduct Authority.
“We were waiting for this letter from the FCA. Lenders have always been encouraged to review past loans, and businesses have made proactive payments since 2014. Our members remain committed to treating customers fairly.