In March 2014, shortly before it took over responsibility for regulating consumer credit, the FCA announced it would carry out a thematic review into how payday lenders and other high cost short term credit providers collect debts and treat borrowers who experience financial difficulty. The review which covered 60 per cent of the market revealed unacceptable practices from many lenders, including failures to recognise customers in financial difficulty, failure to direct people to free debt advice and firms offering inflexible repayment options.

However, the FCA’s work also showed that many firms have taken steps over the past 12 months to change behaviour and ensure that they are able to meet the FCA’s requirements. These include changes to senior management, training staff to deal with struggling customers and improving monitoring, compliance and managing risk.

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. 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.

“The real test for these lenders will be FCA authorisation where they will have to demonstrate exactly how much progress they have made if they want to remain in the market.”

The FCA 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.

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 advisors providing crucial information about why some customers were failing to pay. Upon 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 collections activity if they provide evidence that they are working with a debt advisor to manage their debts.

The FCA found further examples of actions that may have exacerbated already stressful situations, including:

“The FCA have revealed shocking instances of struggling consumers being completely ignored when they asked for help when they got into arrears. Piles of unsorted paperwork and medical evidence was found at one lender. For these serious unacceptable breaches of regulatory rules we expect the FCA to follow up with robust enforcement fines.

“The one positive we can take from this long list of terrible practice is the fact that the FCA have said that the industry have already put in place changes to ensure these awful practices do not happen again. Indeed, since the FCA took over regulation of this market a year ago we have seen a 20 per cent decrease in the number of complaints to Scottish CABs regarding payday lenders. There are still too many people being caught up in crisis debt, but the tougher regulation does seem to be having some impact. So the FCA must continue in this work and not let up on rogue lenders.

“Meanwhile we urge the public to again hear the message that taking out payday loans can get them into serious financial problems, and that if they need to borrow money they should shop around for safer options, like credit unions.”