Consumer organisation Which? has called on the Financial Conduct Authority (FCA) to act over the issue of default fees – fees imposed for missed repayments – being charged by payday lenders. Back in January 2014, a Which? investigation revealed that of the 17 lenders surveyed, 10 were charging fees of £20 or more. Four charged £25 or more and one (Wonga) charged £30.
Which? has even asserted that the fees being charged are illegal, in that the Unfair Terms in Consumer Contracts Regulations 1999 prohibit default fees being charged that are disproportionate to the administrative costs incurred by the lender as a result. It cites guidance from former consumer credit regulator the Office of Fair Trading that default fees should be no higher than £12 for credit card defaults, unless there are exceptional circumstances. None of the 17 lenders charge less than £12, however four charge exactly this amount.
Which? notes that 56% of payday loan borrowers incur some form of late payment fee.
Which? wrote to the lenders asking them to take action, but the organisation says it has not received commitments from any lenders to reduce their fees. It adds that the lenders
“failed to produce any evidence to justify their excessive fees since we challenged them.”
Which? first asked the regulator to intervene back in February 2014, and repeated its call in July 2014, shortly after Wonga was ordered by the FCA to pay £2.6 million in compensation to customers who received debt collection letters purporting to come from one of two law firms, firms which in fact did not exist.
One of the consumer body’s ideas is that a cap on the size of default fees could be introduced as part of the forthcoming limit on the total cost of credit.
Which? executive director Richard Lloyd commented:
“The FCA must now start with default fees charged by some payday lenders to show it is serious about getting a fairer deal for borrowers.”
The regulatory landscape for payday lenders continues to change. The FCA has taken over regulation of consumer credit, and has introduced new rules regarding matters such as rollovers, use of Continuous Payment Authority and promotional material. The regulator is also carrying out a series of monitoring visits to lenders both large and small.
In January 2015, the FCA will impose a limit on the total cost of credit, the level of which is yet to be confirmed. In addition, the Competition and Markets Authority is investigating various competition issues regarding the payday loan market, and has already revealed provisional results suggesting that there is a lack of effective price competition in the market, which is driving up the costs of loan repayments.