A new crackdown from financial regulators could put a quarter of payday lenders out of business, the head of the Financial Conduct Authority has said.
Martin Wheatley told Radio 4's Today programme:
"I think our processes will force approximately a quarter of the firms out of the industry and that’s a good thing because those are the firms that have poor practices, and for the rest, we want them to improve.”
The Consumer Finance Association, which represents major payday lenders, said its members would co-operate with strict new regulations by the Financial Conduct Authority but urged the City regulator to tackle practices of the "least reputable lenders".
We support action to tackle poor practice and, of course, the best-known lenders will cooperate with another in a long series of reviews, but we urge the FCA to use its proposed price cap on credit to tackle excessive default fees and charges which are used by the least reputable lenders to profit from customers who are already in dire straits.
CFA members offer a range of help for customers in financial difficulty including freezing interest and charges to prevent a short-term loan becoming a long-term debt.
– Russell Hamblin-Boone, chief executive of the Consumer Finance Association
The City regulator said struggling borrowers should be treated "with sensitivity" by payday firms and said that it expects that around one quarter of lenders will decide they cannot meet its higher consumer protection standards and leave the market when it takes over next month.
"There will be no place in an FCA-regulated consumer credit market for payday lenders that only care about making a fast buck," said Martin Wheatley, Financial Conduct Authority chief executive.
The FCA will examine the culture of each payday firm and it will want to see how they communicate, how they propose to help people regain control of their debt, and how sympathetic they are to each borrower's situation.
It is expected to work with lenders to find ways for them to share more up-to-date information about borrowers, to prevent them from handing out loans which turn out to be unaffordable.
The way payday firms treat struggling customers will come under scrutiny by the City regulator, which has announced a new inquiry to see how sympathetic lenders are when borrowers have trouble paying back their debts.
The Financial Conduct Authority, which takes over supervision of the consumer credit market, including payday firms, from April 1, wants to see whether payday firms and other high-cost short-term lenders are putting too much focus on profits rather than consumers' interests.
It is treating the investigation as "a priority" because three-fifths of complaints to the Office of Fair Trading (OFT) are about how debts are collected, and more than a third of payday loans are repaid late or not at all - equating to around 3.5 million loans each year.
The FCA said its new rules should reduce the numbers, but it also wants to see struggling borrowers helped by discussions on the different options open to them rather than "piling on more pressure" by simply calling the debt collectors.