The payday industry is beginning to take a more customer-focused approach to its business, but 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.
In March 2014, shortly before it took over responsibility for regulating consumer credit, the FCA announced it would carry out a thematic review into how payday lenders and other high cost short term credit providers collect debts and treat borrowers who experience financial difficulty. The review which covered 60 per cent of the market revealed unacceptable practices from many lenders, including failures to recognise customers in financial difficulty, failure to direct people to free debt advice and firms offering inflexible repayment options.
However, the FCA's work also showed that many firms have taken steps over the past 12 months to change behaviour and ensure that they are able to meet the FCA's requirements. These include changes to senior management, training staff to deal with struggling customers and improving monitoring, compliance and managing risk.
Tracey McDermott, director of supervision and authorisations at the FCA, said:
“Our rules are designed to ensure loans are affordable; that customers who get into difficulty are treated fairly and that they are not pressurised into unaffordable and unsustainable repayment plans. 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 found serious non-compliance and unfair practices in all firms that it reviewed, leading to poor outcomes for many customers and in some cases, 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.
The FCA found further examples of actions that may have exacerbated already stressful situations, including:
- repayment plans that were clearly unsustainable and subsequently failed
- firms not dealing appropriately with issues when things went wrong, for example staff failing to investigate or acknowledge complaints and customers having to explain their situation multiple times as a result of poor record-keeping
- firms engaging in misleading practices to seek payment from customers in arrears
- systems failures resulting in incorrect balances, fees and charges erroneously added, and in some cases, duplicate payments being taken.
Where situations of non-compliance were uncovered, the FCA has intervened quickly to get firms to take specific steps to ensure the failings are not repeated in the future. In some cases, investigations are ongoing and the regulator is working with firms to determine appropriate levels of redress for those affected. In a number of cases, our investigations have led to the FCA commissioning an independent skilled person's review of a firm's practices, at the firm's own expense, or we have restricted the ability of a firm to do business until improvements are made.
The FCA has been encouraged by the steps taken by many firms to change behaviour and fully implement the rules over the last 12 months, including:
- changes to senior management
- revising policies and procedures for collections cultures that are focused on treating customers fairly
- implementation of training programmes to ensure staff are equipped to deal with struggling customers appropriately
- improving approaches to monitoring, compliance and managing risk.
The FCA reviewed a selection of smaller and large firms, representative of the payday market, including online and high street lenders. Information from the thematic review and ongoing investigative work will form part of the assessment of firms during the process for FCA authorisation.