FCA urged to crack down on ‘irresponsible’ payday lenders flouting guidance

Citizens Advice said a quarter of payday loan borrowers said they were not, or could not remember being asked any questions about their financial situation or ability to repay when taking out a loan.

The charity had asked 432 consumers between March and July and found those who had not gone through credit checks were almost twice as likely to have trouble repaying their loan as those who did remember having checks.

The research showed a number of firms were “flouting FCA guidance” and “trapping people with loans they can’t afford”, the charity said. It wants the regulator to force lenders to introduce tighter credit checks before agreeing to a loan.

Chief executive Gillian Guy said: “Irresponsible behaviour by some payday lenders is trapping people with loans they can’t afford.

“The time has come for the FCA to turn its guidance into rules – forcing every single payday lender to carry out rigorous financial checks on potential borrowers to prevent people falling into deepening debt.”

The regulator introduced a cap on payday loan interest rates and fees in January 2015 after it found evidence of widespread malpractice, including overly aggressive collections practices directed at struggling borrowers.

It also ordered a number of lenders to pay compensation, including the parent of Pounds to Pocket and Quick Quid which was ordered to pay £1.7m to almost 4,000 customers for failing to carry out adequate affordability checks.

Dollar Financial was ordered to repay £15.4m to 147,000 customers who borrowed unaffordable loans and suffered at the hands of poor collection practices.

Perhaps the most prominent case, Wonga, was forced to pay £2.6m to around 45,000 customers for ‘unfair and misleading’ debt collection practices after a probe by the Office of Fair Trading found it had sent letters to customers in arrears from non-existent law firms threatening legal action.

In some instances, Wonga had also added charges to customers’ accounts to cover the administration fees associated with sending the letters, the regulator said.

Citizens Advice said it has seen marked improvement in the sector since the FCA’s remedial action but more needed to be done.

For instance, since January last year the charity’s payday loan cases dropped 45% – from a monthly average of 2,821 issues pre-cap to 1,534 afterwards. It also estimated since October 2013 almost 40% of payday loan firms have left the market.

However, it found 98% of people still deemed it “easy” to get a payday loan, with online and phone applications considered particularly easy methods.

About a quarter of local Citizens Advice advisers said inadequate credit checks were the biggest cause of problems to the people they help with payday loans.

The charity also detected new methods used to collect payments from people’s accounts. It found a number of cases where a payday lender asked people to share their internet banking details including login, password and memorable characters so a lender could directly access their account and adjust funds without advance permission from the borrower.

Guy said: “New measures and guidelines from the FCA have helped to clean up the market and the number of people turning to us for help has dropped significantly. But it’s clear some payday loan firms are flouting the FCA’s guidance and selling people loans costing hundreds of pounds that they struggle to pay back.

“[We believe] there is an opportunity to go further in tightening its rules on lending – forcing all firms to carry out rigorous checks on people’s finances before agreeing new loans. This would require lenders – at the very least – to find out how much potential borrowers earn and spend before approving their applications.”