Payday loan
The FCA has said that many payday lenders are not following the guidelinesReuters

The most vulnerable people continue to be exploited by nefarious and non-compliant payday loans companies, according to a 12-month review of the sector by UK regulators which unearthed backlogs of letters excusing borrowers from making payments.

The Financial Conduct Authority (FCA) undertook a review of 60% of the market and stated that it found "serious non-compliance and unfair practices in all firms that it reviewed, leading to poor outcomes for many customers and in some cases, serious detriment and financial loss".

The regulator encountered failures to recognise customers in financial difficulty, failure to direct people to free debt advice and firms offering inflexible repayment options.

Reviews of three firms revealed a backlog of letters and documentation, including from vulnerable customers who had fallen behind in repayments. This documentation included medical evidence and letters from debt advisors providing crucial information about why some customers were failing to pay. Upon further investigation it was revealed that some of these customers were still being pursued by collection agents.

Firms are required to give customers "breathing space" from collections activity if they provide evidence that they are working with a debt advisor to manage their debts, said the FCA.

Tracey McDermott, director of supervision and authorisations at the FCA, said: "This segment of the industry has, for too long, been in the spotlight for the wrong reasons. It is essential that the more customer-focused approach we have started to see is maintained and embedded as we go forward."

Other common failings included:

  • repayment plans that were clearly unsustainable and subsequently failed
  • firms not dealing appropriately with issues when things went wrong, for example staff failing to investigate or acknowledge complaints and customers having to explain their situation multiple times as a result of poor record-keeping
  • firms engaging in misleading practices to seek payment from customers in arrears
  • systems failures resulting in incorrect balances, fees and charges erroneously added, and in some cases, duplicate payments being taken.

The FCA did point to evidence that some firms had improved their practices over the past year, which typically included making "changes to senior management, training staff to deal with struggling customers and improving monitoring, compliance and managing risk".

In some cases, however, investigations are ongoing and the regulator is working with firms to determine appropriate levels of redress for those affected.

And in a number of cases, the FCA has commissioned an independent skilled person's review of a firm's practices, at the firm's own expense; restrictions had been placed on others until improvements are made.

"The real test for these lenders will be FCA authorisation where they will have to demonstrate exactly how much progress they have made if they want to remain in the market," added McDermott.