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Payday lenders face new debt probe
The regulator wants to see whether payday firms and other high-cost short-term lenders are putting too much focus on profits rather than consumers' interests
Payday lenders are facing a new inquiry to see how sympathetic they are when customers struggle to pay back their debts, the City regulator has announced.
The Financial Conduct Authority (FCA) said the review will be one of its first actions when it takes over supervision of the consumer credit market, including payday firms, from April 1.
The regulator, which is already planning a range of curbs to toughen up on the sector, wants to see whether payday firms and other high-cost short-term lenders are putting too much focus on profits rather than consumers' interests.
It is treating the investigation as "a priority" because three-fifths of complaints to the Office of Fair Trading (OFT) are about how debts are collected, and more than a third of payday loans are repaid late or not at all - equating to around 3.5 million loans each year.
The FCA said its new rules should reduce the numbers, but it also wants to see struggling borrowers helped by discussions on the different options open to them rather than "piling on more pressure" by simply calling the debt collectors.
Around 50,000 consumer credit firms are expected to come under the FCA's remit from next month, of which around 200 will be payday lenders.
The FCA expects that around one quarter of payday firms will decide they cannot meet its higher consumer protection standards and leave the market.
Analysis by the Competition Commission has found that payday lenders currently issue approximately 10.2 million loans a year, worth £2.8 billion. The average size of a payday loan is £260.
By comparison, t he entire consumer credit market, which is currently overseen by the OFT, is worth over £200 billion.
The FCA will look at the culture of each payday firm and it will want to see how they communicate, how they propose to help people regain control of their debt, and how sympathetic they are to each borrower's situation.
Martin Wheatley, FCA chief executive, said borrowers who find it hard to make ends meet day-to-day should be treated "with sensitivity".
He warned: "There will be no place in an FCA-regulated consumer credit market for payday lenders that only care about making a fast buck."
From April, the FCA will be visiting the biggest payday firms to analyse their business models and culture, moving quickly to ban any promotions it finds to be misleading and working with lenders to find ways for them to share more up-to-date information about borrowers, to prevent them from handing out loans which turn out to be unaffordable.
This summer, the FCA will consult about the possibility of placing a cap on the overall cost of short-term credit, which would be put in place early next year.
The regulator recently announced a finalised set of rules that payday firms will have to abide by, including limiting to two both the number of times a loan can be rolled-over and the number of times lenders are allowed to make an unsuccessful attempt to dip into a borrower's bank account to take a repayment.
Mandatory checks will be introduced to make sure someone taking out a payday loan can afford it.
The whole payday lending sector is currently undergoing another investigation - by the Competition Commission - after the OFT found deep-rooted problems in the sector, including some firms appearing to base their business models around people who cannot afford to pay their loans back on time, meaning the cost of the debt balloons. The Commission will report on this later this year.
Last month, StepChange debt charity reported evidence that payday loans are still causing ''widespread harm and misery'', despite efforts by the industry to make improvements to affordability checks and the treatment of customers with problem debt.
StepChange said it had nearly 14,000 cries for help last year from people who were struggling with five payday loans or more.
Financial Secretary to the Treasury Sajid Javid said: "The Government welcomes the FCA's review into the debt collection practices of payday lenders.
"It is right that the FCA gets on with the job of protecting consumers by taking tough action to address bad practice in the payday market.
"This work, alongside the new consumer credit rules announced by the FCA and the cost of credit cap mandated by Government, will have a profound impact on protecting consumers."
Richard Lloyd, executive director of consumer group Which?, said: " The payday market is dogged by poor practice and we know borrowers in difficulty are not always treated fairly.
"This review is another encouraging sign the FCA is showing it means business and won't tolerate unscrupulous lenders.
"We'd like to see a ban on excessive fees and charges when borrowers default, which can be as high as £30. These charges should reflect lenders' actual costs."
Russell Hamblin-Boone, chief executive of the Consumer Finance Association (CFA), which represents major short-term lenders, said: "We support action to tackle poor practice and, of course, the best-known lenders will cooperate with another in a long series of reviews, b ut we urge the FCA to use its proposed price cap on credit to tackle excessive default fees and charges which are used by the least reputable lenders to profit from customers who are already in dire straits.
"CFA members offer a range of help for customers in financial difficulty including freezing interest and charges to prevent a short-term loan becoming a long-term debt."