06Sep

The payday lending sector has changed dramatically over the last four years or so, and the recent news that the UK’s largest and best-known short-term lender has entered administration only serves to further illustrate this.

The firm’s statement said that “the management team had no alternative but to place the companies into administration”, and that its “UK business will not be accepting any new loan applications.” However, customers who have outstanding loans with the firm are still expected to repay any what they owe – it is believed that around 220,000 customers have outstanding loans with the firm, collectively owing more than £400 million.

The administrators now plan to explore the sale of the firm’s loan book to other firms.

Essentially the company’s financial difficulties are due to a number of factors:

  • The stricter rules that were introduced by the Financial Conduct Authority (FCA) when it took over as consumer credit regulator in 2014
  • The payday loan price cap introduced by the FCA, which limits daily interest to 0.8%, and reduces the maximum Annual Percentage Rate (APR) on a payday loan to 1509% (The firm previously charged up to 5,853% APR)
  • The FCA’s instruction to the firm to pay £2.6 million to some 45,000 customers who were subject to unfair debt collection practices, which included the firm sending the customers letters from fake law firms
  • Another FCA intervention that forced the firm to write off £220 million worth of debt held by 330,000 customers, after the firm was found to have granted loans to people who could not afford to repay them
  • The continuing rise in complaints about payday lenders – in the first quarter of this financial year the Financial Ombudsman Service (FOS) took on some 10,979 new payday loan cases, representing some 64% of last year’s total in just the first three months. More than 50% of complaints in this area are being upheld by the Service, which also reports that payday loans are now the second most complained about area, behind only payment protection insurance. Many claims management companies are now active in the payday complaints arena. The firm in question saw complaint volumes rise by a factor of more than 30 between 2014 and 2018

The FCA said it continues to supervise the firm, and that it is working closely with the administrators Grant Thornton to ensure that customers continue to be treated fairly.

The FOS said it would be speaking with the administrators to clarify the position regarding both the complaints about the firm the Service is currently handling, and the complaints it will receive in due course. It is unclear whether there will be any funds left to pay compensation to disadvantaged customers, and the Financial Services Compensation Scheme offers no protection for customers of consumer credit firms. Customers with valid claims against the firm will instead be treated as “unsecured creditors”. The secured creditors will have priority when Grant Thornton distributes the proceeds from any sale of the firm’s assets.

Commercial pressures in the sector may now be extremely tight, but the FCA rules are non-negotiable. Loans cannot be made to customers without rigorous credit and affordability checks being conducted. Customers who fall into arrears must be treated fairly at all times and attempts must be made to reach an amicable repayment solution wherever possible.

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