The Financial Conduct Authority (FCA) has officially written to a number of short term, payday and High Cost Short Term (HCST) loan providers, ordering them to pay millions of Pounds in compensation to customers. This relates to the mis-selling of these types of finance to customers in the past.
The FCA has reported that there has been a surge in the number of compensation claims against many lenders in the UK. This has led to the collapse of various payday companies including Wonga in recent months. The compensation is payable to many customers of these loans who were sold unaffordable loans in the lead up to the introduction of the FCA’s sweeping legislation in April 2014.
With so many providers of payday loans online alone, this is a scandal that is sending shock waves through the short term lending industry and is set to continue for a number of years to come.
The FCA is instructing lenders to tighten up and check that their assessment criteria as to whether or not an applicant is a truly viable lending prospect are up to scratch. Furthermore, lenders are being instructed to pay compensation to any past customers that were sold loans, having not undergone proper affordability checks in the first place.
What do Lenders Need to do?
There are numerous criteria set by the FCA which lenders need to adhere to at all times to ensure they and the borrower are able to fulfil both sides of the loan agreement in question. For example, a lender may not charge a borrower more than 0.8% interest per day and once the loan amount doubles with interest, the borrower must be placed on a repayment plan or referred to a debt management company.
Furthermore and key to this scandal, lenders are required to carry out sufficient credit and affordability checks to make sure that the borrower is indeed more likely to repay the loan they take out as soon as possible. There are also some immediate measures that the FCA has required lenders to take:
- All checks carried out on applicants and prospective borrowers need to be fully FCA compliant and if any aspect is not, the lender must rectify this as soon as possible. Lenders are also required to generally tighten up their assessment and affordability checks of customers
- If whilst in the process of checking and auditing their affordability checking systems repeated issues, discrepancies or faults are found, the lender must consider paying compensation in the first place and proactively to customers
- The FCA states that lenders are fully responsible for the compensation claim costs. This includes payments to the ombudsman as well as the compensation amount payable to the customer themselves
- If the lender in question, required to pay compensation to past customers is unable to meet the financial demands of such payments, they must inform the FCA immediately if it leads to them not being able to meet other financial commitments they may have
A Potential Problem Brewing?
Payday loans have for many years been condemned by many charities, financial bodies and institutions and even the Archbishop of Canterbury. They have been termed ‘legal loan sharking’ and ‘exploitative.’ Lenders including Wonga were at times charging customers interest rates of more than 5,500%m leading to huge levels of consumer debt, which to many, was unpayable.
Moreover, now, lenders are required to assess, address and respond to every complaint properly. This means that there are many more payments being made to both the ombudsman as well as the aggrieved customers from the past. With the rise of claims management companies in the UK, assisting with these claims, it is likely that more and more lenders are going to feel the financial and regulatory pinch in the months and years to follow.