Payday lenders still treating customers unfairly

Payday loan customers are still facing "unacceptable practices" despite the recent clampdown on the industry, the watchdog revealed today.

The Financial Conduct Authority (FCA) has been encouraged by the steps being taken by many firms to improve behaviour but said that its research found many customers in arrears were still being treated unfairly.

It noted that people were not being directed to free debt advice and firms were guilty of offering struggling consumers inflexible repayment options.

The FCA said it found serious non-compliance and unfair practices in all firms that it reviewed, leading to poor outcomes for many customers and, in some cases, serious detriment and financial loss.

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Reviews of three firms revealed a backlog of letters and documentation, including from vulnerable customers who had fallen behind in repayments.

This documentation included medical evidence and letters from debt advisers providing crucial information about why some customers were failing to pay.

On further investigation, it was revealed that some of these customers were still being pursued by collection agents.

Firms are required to give customers "breathing space" from collection activity if they provide evidence that they are working with a debt adviser to manage their debts.

Tracey McDermott, director of supervision and authorisations at the FCA, said: "Our rules are designed to ensure loans are affordable, that customers who get into difficulty are treated fairly, and that they are not pressurised into unaffordable and unsustainable repayment plans.

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"This segment of the industry has, for too long, been in the spotlight for the wrong reasons. It is essential that the more customer-focused approach we have started to see is maintained and embedded as we go forward."

She said the real test for lenders will be the FCA authorisation process where they will have to demonstrate how much progress they have made if they want to remain in the market.

New rules launched this year by the FCA have capped the fees and interest imposed by lenders in an effort to stop debts spiralling out of control.

The Financial Ombudsman Service (FOS), which resolves disputes when financial firms and consumers cannot come to an agreement, said it has seen vulnerable payday loan customers being treated in an "alarming" way.

The ombudsman has seen a 64% increase in payday lending complaints since 2012 and it is currently taking on more than 70 new cases each month. It is finding in consumers' favour in around two-thirds (66%) of cases.

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The main complaint themes it sees include the loan provider being unwilling to accept a suitable repayment plan, poor administration and customer service as well as complaints about debt-chasing.

The ombudsman said it has also started to receive complaints from consumers who claim a payday loan was taken out in their names fraudulently.

Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline, said many payday lenders need to drastically improve the way they treat customers in financial difficulty.

She said: "Identifying these customers at an early stage, treating them fairly and referring them to free advice is crucial.

"On the debt advice front line we know that lenders who take the right action early can often stop a temporary financial difficulty becoming a serious debt problem."

Mike O'Connor, chief executive of StepChange Debt Charity, said that firms have not only given loans to people who could not afford them, but they have compounded borrowers' problems by treating them badly when they fell into difficulty.

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He said: "When people experiencing financial problems are treated poorly by their lender it adds stress and anxiety to an already difficult situation and more often than not makes a bad financial situation even worse."

But he said the charity has seen "signs of improvement" in the payday loans sector and it will continue to work with the FCA and with industry to ensure that borrowers get the protections they need.

Russell Hamblin-Boone, chief executive of short-term lending trade body the Consumer Finance Association (CFA), said: "These are early days for this young industry adjusting to a new set of regulations...

"This review is a valuable snapshot of evolving firm practice as it shows significant progress has been made but also highlights where further improvement is needed.

"No firms have perfect systems but, while only high-cost short-term credit has so far been scrutinised, the rest of the credit sector can learn from this early review of the new regulatory regime."

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Unacceptable practices

Here are some examples of how payday loan customers have been let down among the Financial Conduct Authority (FCA)'s findings:

Failure to record information properly
The FCA listened to a call from a collections agent to a customer in arrears who had missed repayments. The customer explained that he was grieving for the unexpected death of his son and had to stop working due to illness. His income had also been affected by the costs of the funeral.

The firm operated an escalation route to a dedicated team for sensitive situations such as a bereavement, but the agent seemed unaware of this, so the customer was not referred. The call was unexpectedly terminated and the agent did not make a note of the call on the system or refer it to a manager, so the customer's telephone numbers were placed back onto the automated dialler to be called again later that day.

Failure to consider where it might be appropriate to point customers towards free help
Another customer spoke to his firm on three occasions within one month of missing his payment. He told the firm that his partner had lost their job, the household income had been reduced and he was struggling to pay priority bills. The customer was not told during these conversations that free and independent debt advice was available which might be able to help him.

After the customer had been in arrears for 60 days the firm sent him a standard letter which stated that if he made contact with the firm it could provide contact details of providers of free and independent advice. This was followed by a further 12 letters, none of which signposted him to free and independent debt advice. The customer entered a repayment arrangement after 90 days in arrears but it was not until he had been in arrears for 174 days that a letter was sent which provided actual contact details for sources of free and independent debt advice.

Unsustainable repayment arrangements
A customer had broken and then reset an arrangement to repay his arrears 10 times over 11 months.

Despite the firm having contact with the customer each time they reset the arrangement, there was no record of any discussion around why the arrangement kept breaking, nor an exploration of the customer's income and outgoings to support a more sustainable arrangement being developed. The repayment arrangement was set for the same amount each time and the customer had not been directed to free and independent debt advice.

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