10th March 2015
Payday loan companies are failing to treat customers who miss repayments fairly, an investigation has found.
A review of the first twelve months of the Financial Conduct Authority’s (FCA) regulation of the sector has shown that too many firms have been failing to meet the requirements to treat customers in arrears fairly.
The review revealed unacceptable practices from many payday lenders, including failure to recognise customers in financial difficulty, failure to direct people to free debt advice and firms offering inflexible repayment options.
The FCA found serious rule breaches and unfair practices in all firms that it reviewed, which in some cases led to serious detriment and financial loss.
Reviews of three firms revealed a backlog of letters and documentation, including from vulnerable customers who had fallen behind in repayments. This documentation included medical evidence and letters from debt advisors providing crucial information about why some customers were failing to pay. Upon further investigation it was revealed that some of these customers were still being pursued by collection agents.
Firms are required to give customers “breathing space” from collections activity if they provide evidence that they are working with a debt advisor to manage their debts.
Other poor practice included repayment plans that were clearly unsustainable and subsequently failed, staff failing to investigate or acknowledge complaints and customers having to explain their situation multiple times as a result of poor record-keeping. The FCA also found examples of firms engaging in misleading practices to chase payment from customers in arrears, incorrect balances, fees, erroneous charges, and in some cases, duplicate payments being taken.
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.”
Richard Lloyd, executive director of Which?, said: “This is yet further evidence that payday lenders are failing some of the most vulnerable consumers. The regulator must continue to take action to ensure that borrowers in difficulty are treated fairly and protected from falling further into a spiral of debt.
“We also want the FCA to keep the level of the price cap under review and look at unfair practices and excessive fees across the whole of the credit market.”
Previous Which? research has found that In 2014, each month an average of 880,000 households took out a payday loan. More than a million households (4%) are using unauthorised overdrafts or payday loans. Four in ten (39%) are worried about the level of their household debt.
Mike O’Connor, chief executive of StepChange Debt Charity, said: “Today’s 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.”
He added: “We are starting to signs of improvement in the payday sector, and we will continue to work with the FCA and the industry to ensure that borrowers get the protections that they need.”
In some cases, the FCA’s investigations are ongoing and the regulator is working with firms to determine redress for those affected. In some cases it has restricted the ability of a firm to do business until improvements are made.
However, the FCA’s work also showed that many firms have taken steps over the past 12 months to ensure that they are able to meet the requirement, such as changes to senior management, training staff to deal with struggling customers, improving monitoring, compliance and managing risk