‘Dear CEO’ letters sent by the Financial Conduct Authority (FCA) often instruct firms to review their business practices and make any necessary changes. However, the recent letter to the chiefs of the UK’s high cost short-term lenders goes one step further and asks firms to “consider whether proactive redress may be required”, i.e. whether compensation should be paid to its clients. The central requirement of the letter though is for CEOs to “assess their lending activity to determine whether creditworthiness assessments are compliant.”

Few people within the payday sector need any reminder that the sector’s largest player has recently entered administration, partly because it was unable to cope with the sums it needed to pay in redress to disadvantaged customers. With this in mind, the letter also asks the recipients to “inform the FCA if they are unable (now or in the future) to meet their financial commitments because of any remediation costs.”

The letter, from Jonathan Davidson, the Director of Supervision – Retail and Authorisations at the FCA, says that it is being sent because of “the increase in complaints about unaffordable lending (including complaints about a ‘chain’ of loans over an extended period)”. Few in the payday sector also need any reminder that complaint volumes have soared in recent months and years. According to figures from the Financial Ombudsman Service (FOS), payday loans are now the second most complained about area, making up 10% of the total complaints received between April and June 2018. The uphold rate for payday loan complaints closed during this period was 56%, one of the highest for all product areas.

The letter asks firms to look at the recently published decisions on the FOS website, and to use these in deciding whether to uphold the complaints they receive. Firms are also asked to make provision for any remediation they may need to repay.

Compensation is often paid to customers when their complaints are upheld. However, this letter suggests that lenders may need to go further, and to pay compensation to certain customers who haven’t complained if it is identified that they may have suffered detriment. Here the letter reads:

“Where firms identify recurring or systemic problems in their provision of a financial service, which could include problems in relation to the carrying out of affordability assessments, the 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.”

The letter concludes by stating some of the FCA’s rules on affordability assessments, including:

“A firm must not make a loan unless it can demonstrate that it has, before doing so, undertaken a compliant creditworthiness assessment and had proper regard to the outcome of that assessment in making a judgement about affordability risk.”

“The lender must consider the customer’s ability to make repayments out of income: • without the customer having to borrow to meet the repayments • without failing to make any other payment the customer has a contractual or statutory obligation to make, and • without the repayments having a significant adverse impact on the customer’s financial situation.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article