LONDON, March 12 (Reuters) - Britain’s financial watchdog will review in April how payday lenders collect debts and impose a cap from early 2015 on the sky-high interest rates criticised by politicians and churches.
The Financial Conduct Authority said the review will be one of its first acts next month when it takes on supervision of about 50,000 consumer credit firms.
Of those, around 200 offer the short-term loans intended to tide borrowers over until payday - a market now worth about 2.8 billion pounds ($4.7 billion).
FCA also said it will consult this summer on capping the total cost of credit for all payday lenders from early next year, a step forced onto it by the government.
Wonga, one of the biggest payday lenders, charges an annual interest rate of 5,853 percent, a level that critics say tips households into a deepening spiral of debt.
“Our new rules mean that anybody taking out a payday loan will be treated much better than before,” FCA Chief Executive Martin Wheatley said in a statement.
”But that’s just part of the story; one in three loans go unpaid or are repaid late so we will be looking specifically at how firms treat customers struggling with repayments.
“There will be no place in an FCA-regulated consumer credit market for payday lenders that only care about making a fast buck,” Wheatley said.
Last month the FCA published new rules to regulate the UK’s 200 billion pound ($332.55 billion) consumer credit market.
The FCA had initially resisted moves to cap interest rates, saying it could drive customers into the arms of loan sharks but the watchdog was overruled by the government.
Sajid Javid, a junior finance minister, said on Wednesday that the FCA, launched in April 2013 to shake up supervision found wanting in the 2007-09 financial crisis, has a clear mandate to stop inappropriate behaviour.
“It is right that the FCA gets on with the job of protecting consumers by taking tough action to address bad practice in the payday market,” Javid said.
“This work, alongside the new consumer credit rules announced by the FCA and the cost of credit cap mandated by government, will have a profound impact on protecting consumers.”
The FCA said payday lending is a priority because six out of 10 complaints to the Office of Fair Trading (OFT) are about how debts are collected, and more than a third of all payday loans are repaid late or not at all.
The review will look at the different repayment options available rather than piling on more pressure on borrowers or simply calling in the debt collectors.
The watchdog will also visit the biggest payday lenders to analyse their business models and culture.
It will assess the financial promotions of payday and other high-cost short-term lenders and move quickly to ban any that are misleading.
The FCA will also take on investigations from the outgoing consumer credit regulator, the OFT, and consider whether it should start its own for the worst performing firms.
The watchdog expects about a quarter of payday lenders will exit the market rather than try to meet the FCA’s new authorisation requirements.
Richard Lloyd, executive director of consumer lobby group Which? said there should be a ban on excessive fees and charges when borrowers default which can be as high as 30 pounds.
“These charges should reflect lenders’ actual costs,” Lloyd said.
The UK Competition Commission has found that payday lenders issue about 10.2 million pounds in loans a year, with the average loan sized at around 260 pounds.