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Blog: Responsible payday lending is critical for consumer protection

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First published on Global Banking and Finance Review in October 2018

Many firms providing a vital service to cash-flow challenged consumers have found themselves pulled into an industry crisis.

This has been created by intense media criticism and an avalanche of complaints following on from regulatory reforms implemented early in 2015 aimed at curbing exploitative practices. This situation has been intensified by a small proportion of claims management companies (CMCs) that have proactively targeted firms in relation to compensation claims.

While reform is ongoing, the implementation of policies shaped around fairness for consumers and the protection of vulnerable customers must be central. Firms must also ensure that they are equipped with the capacity and expertise to handle future regulatory changes and spikes in complaints effectively. By acknowledging these challenges, addressing them quickly and compliantly and focusing on the solution, the payday lending sector can take a responsible approach that demonstrates leadership and highlights the important service it is providing to consumers in need of short-term finance.

However, the sector must move quickly to address fundamental shortcomings that remain. This is even more relevant considering recent warnings from the Consumer Credit Trade Association (CCTA) that cash-strapped consumers, without the backing of parents with savings, are increasingly at risk of turning to black market alternatives if the short-term loan sector becomes increasingly unstable. Providing loans through the lens of long-term customer well-being is crucial and has also been highlighted recently by the Church of England’s interest in purchasing pay-day lender debt to prevent it falling into unscrupulous hands.

Considering these trends, a key strategy to restore stability in the sector is to analyse the trajectory of regulatory reforms and implement mechanisms that respond to their evolution. The FCA’s cap on payday loan costs in January 2015 and the subsequent reform stimulated by the CMA’s investigation into the sector helped to promote competition and went some way to empowering consumers and ensuring they were being treated fairly.

The FCA has since been under mounting pressure to increase the scope and scale of regulatory reform and has continued to scrutinise high cost short-term loans ahead of the planned price cap review in 2020. This could mean a further tightening of the daily price cap of 0.8% and an additional reduction in the maximum one-off default fee of £15.And while FCA CEO Andrew Bailey has stated the organisation is “pleased to see clear evidence of improvement in the payday lending market”, he caveated this with an acknowledgment that there is still “more that we can do.”

If managed correctly, far from damaging sector firms, regulatory reform can be embraced and used to empower lenders to become trusted and transparent financial services providers. Firms must review operational processes and successfully adapt in order to be prepared and respond effectively to regulatory evolution. There are some important steps that can be taken to ensure business models are resilient and have fairness for customers at heart.

An extensive and in-depth analysis of customers in early arrears, as well as recoveries and collections policies, should become a fundamental part of ongoing management processes. In addition, it is vital for firms to conduct a robust assessment of customer communication channels and approaches. With the added pressure of high levels of complaints, exacerbated by the role of CMCs, effective customer engagement strategies have never been more important and getting to the heart of historic legacy issues in a timely and proactive fashion is now more important than ever.

Staff training should also include tactics for responsibly dealing with vulnerable customers and a clear understanding of the regulatory landscape and how this impacts borrowers. Moreover, there is a useful role for technology, which when used well can aid customers with debt management: for example, warning them via mobile alerts that payments are due. Outside of complaints handling, expertise is also valuable to help build internal capabilities or provide the capacity needed to quickly and efficiently deal with high levels of customer interactions before they become overwhelming.

There is little doubt that balancing the provision of an important financial service with an adequate response to regulatory reform and negative external scrutiny is a challenge. From Huntswood’s experience in sectors such as retail banking and utilities, where significant progress has been made in ensuring good outcomes for consumers, it is critical to create operational models that proactively build in compliance, expertise and capacity from the outset. This ensures that firms stay ahead of the curve and are resilient enough to withstand any unforeseen shocks or pressures.

By implementing pre-emptive business procedures and early intervention measures, and conducting long-term capacity and expertise planning, the result is that good outcomes can be secured for all consumers, complaints are managed effectively, and further escalation is contained. It is important to remember that payday lenders do have a critical role to play in protecting consumers, ensuring they are empowered while lending responsibly and ultimately providing consumers with safe routes to obtaining short-term finance.

Huntswood can relieve the pressure of handling large volumes of complaints and other forms of inbound customer contact and provide its clients with a wide range of services that deliver good customer outcomes and business efficiencies.