On October 15, the FCA sent a Dear CEO letter entitled Affordability of High Cost Short Term (HCST) loans to payday lenders.
This letter tells the lenders to review their affordability assessments. There are some very clear points about what the FCA expects a payday lender to do if it is not making good affordability assessments now or hasn’t done in the past.
“Chains of loans” over an extended period
The letter starts by saying:
I am writing to you regarding the issues surrounding the increase in complaints about unaffordable lending (including complaints about a ‘chain’ of loans over an extended period)
That part in brackets is important. Too often regulatory discussions about the affordability of lending are at the level of a particular loan. And the FCA’s rules about affordability checks sensibly say that they should be proportionate, so the checks on an individual payday loan would often not be as detailed as on a large, longer term loan.
But long chains of loans – and loans that are rolled many times – turn high cost short term lending into high cost long term lending. And this needs to be taken into account when the lender is checking the affordability of the later loans.
As the letter says:
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, potentially involving additional data and/or verification.
This is exactly the approach that the Financial Ombudsman (FOS) has taken since 2015 when the first few affordability / irresponsible lending complaints started to be made.
The FCA letter reminds the lenders that FOS has recently published four important decisions about payday loan affordability complaints. Two of these involve chains of loans: lender A and lender B. These are very clear:
Lender B’s arguments appear to suggest that it completed broadly the same checks (and applied broadly the same lending criteria) to Mrs M’s loan applications, irrespective of where in the lending chain those individual applications sat…
Lender B carrying out the same checks over and over again also ignores the fact that it ought to have been alert to the possibility Mrs M might’ve been struggling to repay her borrowing from disposable income. And that is why she might’ve kept coming back for further loans. In these circumstances, rather than simply continuing to rely on what it says it had been told by Mrs M about her income and expenditure, I think that it would’ve been fair, reasonable and proportionate for Lender B to have taken steps to verify Mrs M’s actual financial position.
I think that it would be useful for me to start by setting out some examples of the kind of indicators that I think are particularly important when deciding this matter…
• the number of times that Lender B had lent to Mrs M in total
• the time period over which it had provided those loans
• the amounts that Lender B was lending to Mrs M, including any general trends
• the time between Mrs M repaying one loan and Lender B providing the next.
(Debt Camel readers will notice that these are the criteria that I suggest people should use to assess their own complaints eg in deciding whether to take a case rejected by a lender to FOS.)
Learning from FOS decisions
The FCA’s letter reminds the Payday Lender CEO that its DISP rules say that firms should learn from FOS decisions and use this effectively in future complaint handling.
Firms should, of course, have already known this. But the very high uphold rates at FOS – over 50% for some lenders, suggests that some firms have not been applying these lessons correctly. And within the FOS system, it is unfortunately common to see some lenders reject what look like standard adjudicator decisions for no particularly good reason, forcing too many complaints to have to go to an ombudsman decision.
In additions to the two long chain decisions discussed above, the other two recent FOS decisions that the Dear CEO letter mentions, Lender C and Lender D, are about loans that are more than six years old. I have written about these decisions here. In both cases, FOS considers it can look the complaint as the customer complained within three years of becoming aware they could.
UPDATE: QuickQuid still seems to be telling customers it won’t consider refunds on loans over 6 years old, quoting reasons that ignore FOS’s recent decisions, see QuickQuid – misleading customers about loans over 6 years old.
Consider the need for a redress scheme
The Dear CEO letter goes much further than just suggesting payday lenders need to improve their complaints handling. It says:
firms should ascertain the scope and severity of the consumer detriment that might have arisen, and consider whether it is fair and reasonable for the firm to proactively undertake a redress or remediation exercise, which may include contacting customers who have not complained.
That is an excellent idea. If customers with long chains of loans can be provided with automatic refunds, then the lenders and FOS will be able to concentrate their resources on reaching good decisions on the less obviously clearcut cases.
It is also the best response to concerns about claims management companies – provide good, quick redress directly and there is no need for them.
The most depressing sentence
The fact that the FCA feels it is necessary to say:
We also remind you that where the Ombudsman makes an award or direction, such as a requirement to reimburse customers, firms must comply promptly
is very depressing. Some lenders manage to give refunds within a few days. Others seem to treat 28 days as a vague aspirational target.
By now, even the smaller payday lenders will have seen enough complaints to be able to work out an efficient process for calculating and then paying the refund. With the exception of the few cases where a lender has to buy back a debt from a debt collector, I can’t think of a good reason why refunds should not be paid within a week.
Not just a historic problem
I have been saying for a long while that the problems with payday lending are still continuing. FCA regulation, the price cap and limit on rollovers introduced in 2015 have not resulted in all lenders applying good affordability checks consistently.
So I was pleased to see the following in the letter:
We expect the firm to review its current lending processes to ensure it is fully compliant with our rules in CONC. If the firm identifies that its processes do not comply, it should take appropriate steps to address this, which may include considering whether to cease lending until any contraventions are remedied.
My verdict – very good news
This sort of letter draws the attention of a CEO to something they should already have been aware of. They don’t contain new policies. That is fine. There is nothing fundamentally wrong with the FCA’s affordability rules, nor with the OFT’s before them. The problem has been enforcing them.
My article Lessons to be learned from Wonga – 6 policy challenges had How should the DISP rules be effectively enforced? as a challenge for the FCA. This Dear CEO letter is an excellent start in dealing with this.