By Huw Jones
LONDON (Reuters) - Borrowers in arrears are not being treated properly by many so-called payday lenders and some of these high-cost credit providers could be forced to leave the market, Britain's financial watchdog said on Tuesday.
The Financial Conduct Authority (FCA) said it had completed a year-long review of the market that offers short-term loans to tide over borrowers until they are paid and has been criticised by lawmakers and the Church of England for causing misery among customers on low salaries.
"We found unacceptable practices from many lenders, including failure to recognise customers in financial difficulty; failure to direct people to free debt advice; and firms offering inflexible repayment options," the FCA said.
The Consumer Finance Association, which represents payday lenders such as Quick Quid, The Money Shop and Payday UK, said it was early days for a young industry to adjust to new rules.
"But short-term lenders are on a clear path of improvement, with the worst lenders leaving the market and the FCA acknowledging that the lenders they reviewed are demonstrating a real commitment to change," CFA Chief Executive Russell Hamblin-Boone said.
In 2013 the market had 1.6 million customers, who took out 10 million loans worth a total of 2.5 billion pounds ($3.76 billion), but the amount lent dropped 35 percent by August last year as tigher rules began to bite.
Michael Ruck, an enforcement specialist at law firm Pinsent Masons, said the review may be considered the death knell for a large number of payday lenders.
The review found companies engaging in misleading practices to get more money from customers in arrears, forcing the regulator to intervene.
"In some cases our investigations are ongoing and we will consider what further action to take in due course," the watchdog added.
Most firms were making changes such as new senior management and better training, but none of those reviewed met the required standard and could end up having to close.
"The real test for these lenders will be FCA authorisation where they will have to demonstrate exactly how much progress they have made if they want to remain in the market," said Tracey McDermott, the FCA's director of supervision.
The sector is undergoing change after the FCA imposed a cap on interest rates in January, limiting them to 0.8 percent a day, equating to an annual rate limit of 292 percent.
Citizens Advice, however, urged the FCA to remain vigilant.
"As the worst payday lenders are forced out of the market, the FCA must ensure that people are not being caught out by other high-cost lenders," said Citizens Advice, which advises people on money problems and gave evidence to the FCA review.