The recent news that payday lender QuickQuid has gone into administration follows last year's collapse of former industry leader, Wonga. For me, this brings up wider implications for financial services providers to check that their customers clearly understand the risks and are in a position to take them on.
Freedom to choose vs customer protection
In 2015, the Financial Conduct Authority imposed affordability checks and capped payday loan charges in an attempt to protect vulnerable customers. Since then, the number of claims against payday lenders has risen, including claims that affordability checks were not carried out correctly.
This is an area that interests me as I work with financial services firms involved in consumer claims, helping them to understand how they should approach high-stake claims, as well as how to innovate their processes to protect their customers and their businesses from future harm.
In a democratic society, people have the freedom to choose how they live their lives, including how they approach cashflow difficulties. Sadly, with at least 22% of people in the UK living in relative low income, there is a market for services that provide short term cash to struggling households.
This study of the CMA's 2015 report indicates why families might opt to take out a short term loan. Although payday loans are often marketed as one-off loans for unexpected expenses, 53% of borrowers reported “Living expenses such as groceries and utility bills” as their reason for taking out a payday loan.
When it goes wrong
When people repeatedly roll-over loans from month to month, this can result in a significant increase in the amount of debt owed and the consequent spiral into deeper financial difficulty. This is what the FCA was attempting to prevent with its 2015 changes.
Unfortunately, the current systems in place to process claims have not been able to deal with the avalanche of claims that have followed the regulations.
The Financial Ombudsman Service was unable to process thousands of the claims filed against CashEuroNet (which owns QuickQuid), so the administrators are now tasked with settling the remaining cases. These claimants are faced with continued repayment plans without any certainty that they will receive compensation amounting to their loss. This will depend on how much money is available for distribution to unsecured creditors to cover these claims.
Are Capital Adequacy amounts for payday lenders too low?
‘Capital Adequacy’ is the statutory minimum capital reserve that a financial institution must have available to absorb losses and settle liabilities during periods of financial strain. A firm must maintain this minimum level of capital, calculated as a percentage of its risk-weighted assets.
I would question whether the capital adequacy levels are high enough for payday lenders, especially considering the fact that the Financial Services Compensation Scheme, which steps in to compensate customers when insolvent financial services firms have provided inadequate advice, does not apply to consumer credit consumers.
How important is it to review your customer information and suitability checks?
The recent demise of Wonga, QuickQuid and other payday lenders is a reminder for businesses in the sector to review their processes. The lesson is not just for consumer credit firms, but for all financial services firms that wish to deter customers from levelling claims against them at a later date on grounds of mis-selling. Although these customers may be profitable in the short term, ultimately the sheer number of claims levelled against a firm can lead to financial strain.
All firms working within this sector have a duty to provide appropriate information to customers. This includes how information is presented. For example, some financial institutions are introducing simple layering techniques that break terms and conditions down into key points, signposting to further terms. The FCA welcomes this approach to setting out information clearly, so that customers can clearly understand what they are buying and the potential implications of this on their financial situation.
It is also good practice for firms that are providing financial products or advice to carry out appropriate checks on customers' suitability, so that they mitigate the risk of potential claims further down the line.
I will share more guidance on this topic of clear communication to customers in my next article. In the meantime, let me know if you need help with improving your documentation, in order to protect your customers and your business from harm.
“For former customers, who feel they have been taken advantage of and are in financial hardship, the future is still uncertain, as the value of any compensation payouts will now depend on the process of closing the company. What is clear is that in the face of growing regulatory pressures, the curtain appears to be drawing on the payday lender market.” John Cullen, Menzies LLP.