The reputation of the payday lending industry has been dealt a fresh blow in a bruising review from the financial watchdog after the sector’s first 12 months of regulatory scrutiny.
The Financial Conduct Authority found “serious non-compliance and unfair practices” at every firm it reviewed after taking over as the sector’s watchdog in April last year. It said customers were still being failed by “unsustainable” repayment plans and organisational backlogs that left vital documents containing “crucial” information from “vulnerable” customers unread. In some cases that meant people who were too unwell or unable to keep up with repayments were still being harangued by bailiffs.
Investigations ordered by the regulator are still ongoing with the FCA restricting some firms from doing business until improvements are made in “a number of cases”. Although it did find others were, “beginning to take a more customer-focused approach”.
The report alludes to the use of letters from “fake” law firms written by the companies themselves and threatening legal action to frighten customers into keeping up with demands for repayment. Lenders also breached the rules by failing to give customers “breathing space” if they provided evidence they were working with an advisor to get their debts under control.
The City watchdog, which also regulates some of the world’s biggest financial institutions, said it found systems failures that meant “incorrect balances, fees and charges” were added to customers bills and, in some cases, duplicate payments being taken by payday lenders.
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Since it took over regulation of an estimated 400 payday lenders on April 1 2014 the FCA has allowed them to operate on temporary licences whilst they work towards formal authorisation, a process that will provide the “real test” for the sector, it said. Last month Wonga, shirt sponsors of Newcastle United, revealed it was making substantial job cuts in an attempt to satisfy the financial watchdog that its payday loans model is sustainable.
Tracey McDermott, director of supervision and authorisations at the FCA, said: “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 capped the maximum repayments on a loan to twice the original borrowing and limited interest to 0.8 per cent per day in January. Before the regulators took a hatchet to rates in the sector the annual percentage rate they charged could reach into the thousands with one of the best-known lenders, Wonga, charging 5,853 per cent before the cap.
Payday lenders had to apply for authorisation from the FCA by February 28 this year and the FCA estimates it will have processed all applications within six to 12 months.
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It said it was “encouraged” by some of the changes in the sector, including management reshuffles and better training, internal monitoring and compliance at firms.