The Financial Conduct Authority has written a letter to the bosses of payday lending companies. The regulator was urging them to consider ‘affordability risk’ before making loans to borrowers who are financially vulnerable.
In a ‘Dear CEO’ letter thar was sent last Monday, the FCA issued a warning that the lenders should “take prompt action” to make sure that they maintain compliance with te regulations that require them to assess the “creditworthiness” of customers.
It said that a lender “must take reasonable steps to establish or estimate the customer’s income unless it can demonstrate that it is obvious in the circumstances that the customer is able to repay in an affordable manner.”
The warnings of the FCA come after the collapse of Wonga, a payday lender which went into administration at the end of August after experiencing a clampdown from the regulator because of its unfair practices on debt-collection.
In the past years, stricter rules have been imposed on payday lenders and a limit on the charges they can levy. The amount of high-cost, short-term loans that were issued has dramatically declined since 2013. New rules that are scheduled to come into effect next month will be forcing the lenders to come up with clearer rules on lending to avoid possible risks.
A review of the sector that was carried out by the Competition and Markets Authority discovered that there were approximately 1.8 million payday loan customers in the United Kingdom in 2012, who took out a total of 10.2 loans, to a value of £2.8bn. It found that about half of the users of payday loans had recently suffered from debt problems.
Last Monday, the FCA warned lenders to specifically monitor their regular customers. It said that repeated short-term borrowing was a warning of risk.
The FCA stated: “Where a customer has engaged in repeat borrowing over an extended period, this is likely to be relevant in assessing the level of affordability risk and deciding whether a more rigorous assessment may be needed.”
The regulator continued: “While we recognise that there will always be some loans that turn out to be unaffordable, for example, because of the impact of unforeseen circumstances, firms maintaining effective policies and procedures in line with the above requirements should aim to eliminate lending that is predictably unaffordable, minimising the risk of financial distress to consumers.”