Payday lenders must offer compensation for mis-sold credit, says FCA

Payday lenders should offer compensation to customers who may have been mis-sold expensive loans, even if it threatens the company with bankruptcy, the City watchdog has said.

The Financial Conduct Authority said payday lenders should contact customers about potential compensation if creditworthiness assessments were not compliant.

Lenders should inform the regulator to immediately if they may be unable to meet their financial commitments due to the cost of reimbursing customers.

The warning comes after the collapse of Wonga in August. The lender had been one of the most well-known providers of high-cost credit but a crackdown by the FCA and a large rise in complaints made it unprofitable.

The lender said its struggles were due to a “significant” industrywide increase in people making claims in relation to historic loans.

It blamed claims management companies for the rise, but said it was making progress against a transformation plan set out for the business.

The FCA said it was particularly concerned about chains of loans, where an individual borrows repeatedly over an extended period.

It also follows the failure of payday lender Wonga in August, which collapsed following a jump in customer compensation claims after a crackdown on the sector in Britain.