Financial regulator fires warning shot at payday lenders

The Financial Conduct Authority (FCA) said that it had sent a so-called “Dear CEO” letter to providers of high-cost short-term credit asking them to assess whether their creditworthiness assessments are compliant and whether borrowers should be reimbursed.

The watchdog has also told lenders to inform it immediately if the cost of compensating customers with grievances will leave firms unable to meet their financial commitments.

The warning comes amid an increase in complaints about unaffordable lending. There have been concerns about so-called chains of loans, where an individual borrows repeatedly over an extended period.

The move also follows the failure of payday lender Wonga in August, which collapsed following a jump in customer compensation claims after a crackdown on the sector in Britain.

In his letter, Jonathan Davidson, the FCA’s director of supervision for retail and authorisations, said: “Where firms identify recurring or systemic problems in their provision of a financial service, which could include problems in relation to the carrying out of affordability assessments, the firms should ascertain the scope and severity of the consumer detriment that might have arisen.”

Firms should also consider whether it is “fair and reasonable” for the firm to proactively undertake a redress or remediation exercise, which may include contacting customers who have not complained, the letter said.

The letter reminds firms that they are required to analyse the root causes of complaints and, if necessary, correct them.

“We also remind you that where the Ombudsman makes an award or direction, such as a requirement to reimburse customers, firms must comply promptly,’’ the letter said.

“We expect firms to make appropriate provision for any remediation which may be required, including associated costs (for example, fees to the Ombudsman).

“If doing so calls into question your firm’s ability both now and in the future to meet its financial commitments as they fall due, you must notify the FCA immediately.”

Mr Davidson added: “We are also taking the opportunity to remind you of our requirements in respect of affordable lending.

“We expect the firm to review its current lending processes to ensure it is fully compliant with our rules.”

If the firm identifies that its processes do not comply, it should take steps to address this, which may include considering whether to cease lending until any contraventions are remedied, the letter said.

“If the firm becomes aware or has information which reasonably suggests that there are significant breaches of our rules, it must inform the FCA immediately. The firm should explain what steps it plans to take to address the issue.”

The FCA has published a policy statement with new rules and guidance on assessing affordability in consumer credit which come into force on November 1.

The letter added: “A key element of the new rules is an increased emphasis on adequate policies and procedures, and being able to demonstrate compliance if challenged.”

The FCA is the conduct regulator for 58,000 financial services firms and financial markets in the UK and the prudential regulator for more than 18,000 of those firms.