THE outgoing Financial Services Authority has been dubbed a “middle-class regulator” by industry official Chris Cummings after it failed to stem the rise of payday lenders charging extortionate interest rates for poorer borrowers.
TheCityUK, which represents banks and insurance companies, has added its voice to criticism aimed at payday lenders, which are facing tougher restrictions on charging sky-high interest rates.
The industry has grown fivefold since traditional lenders abandoned the consumer credit market after the banking collapse in 2008.
Cummings, chief executive, said that although the financial services industry “hasn’t a shortage of regulation”, the incumbent financial watchdog had failed to address lenders charging interest rates of up to 4,000 per cent.
He said: “Because of how the FSA was constructed, it left itself open to being accused of being a middle-class regulator. It wouldn’t engage with people who needed the most protection and instead focused on people who could have had a better deal.”
The industry fears that the growth of high-interest lending to the poor risks undermining the work of restoring confidence in the wider financial services industry.
Traditional banks and insurance companies are keen to distance themselves from the payday lenders and have been working with TheCityUK to trumpet their ethical values in an effort to reduce the impact of an avalanche of regulation coming into force in the UK, Europe and international markets.
But the rehabilitation of UK financial services is making slow progress. Last week, a survey by CEB revealed that faith in UK banks and insurers had dropped lower than in any other EU country in the past six months, and is below the global average of 47 per cent.
It was the Office of Fair Trading rather than the FSA which last month revealed it had opened formal investigations into several payday lenders over what it called “aggressive” debt collection practices. The OFT confirmed that a full review of 240 such companies was due in the new year.
The UK government is this week set to give the new financial regulator – the Financial Conduct Authority (FCA) – the power to cap interest rates charged by lenders.
Kay Blair, vice-chairman of the Financial Services Consumer Panel, a statutory body set up to advise the FSA, said the new FCA would address the watchdog’s regulatory failings by having the “right people having the right resources and tools to do the job”.
“The relationship has to be rebalanced again, with consumers having much more trust in the industry,” she said. “The industry has to change its ethics and ethos to get trust back again.”
Meanwhile, at a panel event held in Edinburgh last week, Cummings said the industry was seeking ways to “heal itself”. He said new entrants to the traditional financial services market were a “great fillip to the customer position” and argued banks were working to put more staff back into branches to create a “rich eco-system” at the local level.
He said “there are still industry issues that are going to be the source of regulatory scrutiny” but the “moral compass has to start with companies” and not regulators.