The Financial Conduct Authority has taken over regulation of debt management firms from the Office of Fair Trading and has warned that it will ‘take out’ payday loan companies who don’t abide by stricter rules.
‘Our processes will probably force about a quarter of the firms out of the industry, and that's a good thing, as those are the ones that have poor practices,’ Martin Wheatley, chief executive of the FCA, told the BBC.
The payday loan industry is currently facing ‘the biggest overhaul of the consumer credit industry in four decades’. From July 1, mandatory checks will be introduced to make sure someone taking out a payday loan can afford it. The FCA has also said it will limit the number of times a customer can roll over a loan, and firms will also be required to give customers information on how they can get free debt advice. The FCA also plans to visit the top five lenders to check they are following the rules.
The watchdog says it wants to deal with extortionate charges and the danger of borrowers being pushed into a cycle of debt.
The 200 or so payday lenders account for less than 1.5% of the £200bn consumer credit market - a mere drop in the debt ocean. However, the Office of Fair Trading, which until today was in charge of overseeing the industry, said 60% of complaints are about how debts are collected. Moreover, a third of payday loans - around 3.5 million a year - are paid late or not at all, the FCA said.
Reports over the weekend suggested that Wonga chairman Errol Damelin could be stepping down from the company. The South African entrepreneur, who started Wonga in 2007, has faced a battering from politicians, the public and the Church of England for his business model, which allows consumers to borrow up to £1,000 for 30 days on an annualised percentage interest rate of 5,853%.
The FCA also plans to step up its scrutiny of banks' control over their traders to see if lessons have been learned from the scandal over benchmark rate rigging.
Meanwhile, boss Wheatley is himself under considerable pressure for the FCA's disastrous leak of market sensitive information on the insurance industry, which wiped billions off the value of many of the City's leading institutions last week.
He has refused to resign over what Andrew Tyrie, chairman of the Treasury Select Committee, has called 'an extraordinary blunder', but the pressure is mounting. Chancellor George Osborne has sent a letter to FCA chairman John Griffith-Jones, saying he is 'profoundly concerned by the situation'.