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Payday lenders told to offer compensation
Naomi Schraer, News Reporter for Money Saving expert.
The financial regulator has written to payday lenders today telling them they must compensate customers who were sold unaffordable loans.
The letter was sent by the Financial Conduct Authority (FCA) to the chief executives of high-cost, short-term credit providers, following a surge in complaints around unaffordable lending.
According to FCA rules, payday lenders have a responsibility to assess whether or not a customer will be able to afford to repay their loan without having to borrow elsewhere or default on other debts in order to make repayments. They should also check whether repaying the loan will have a 'significant adverse' effect on the customer's finances.
Now the FCA is telling payday lenders to check their assessments are sufficient, and proactively offer compensation to those who were offered loans without proper checks.
The FCA's letter reminds payday lenders of their responsibilities around affordable lending. It particularly highlights the risks of 'chain' loans, where borrowers become dependent on repeated payday loans to afford their repayments.
It tells firms they must take "prompt action" to ensure they are compliant.
What does the FCA say?
- Payday lenders must make sure their creditworthiness assessments are compliant with FCA rules. If they're not, the lender must take steps to improve their assessments, and should consider stopping lending until their checks are sufficient.
- If the lender finds multiple or repeated problems with their systems, including with their affordability checks, they should consider whether they should proactively pay compensation – even to customers who haven't complained.
- Lenders are responsible for all compensation costs, including associated costs such as ombudsman's fees, and should inform the FCA if they won't be able to meet other financial commitments because of these payments.