Quarter of payday lenders may quit under tougher rules
One quarter of payday lenders may pull out of the market under pressure from new regulations.
The Financial Conduct Authority (FCA) is to investigate the way they treat borrowers struggling to repay loans.
It has said the review will be one of its first actions when it takes over regulation of the consumer credit sector on 1 April.
It has already outlined several other plans to toughen regulation in the high-cost short-term loans market.
Martin Wheatley, the FCA's chief executive, told the BBC: "I think our processes will probably force about a quarter of the firms out of the industry and that's a good thing because those are the firms that have poor practices. And for the rest - we want them to improve."
The payday loans industry said it was behind action to tackle poor practice.
More than a third of all payday loans are repaid late or not at all, according to the FCA.
Mr Wheatley said the FCA would take action in several areas: "Stopping profits from vulnerable people is one thing; capping the absolute cost of these loans is another; and stopping lending to people who will never be able to repay. They're the ground rules that we will be introducing that will change this industry."
The FCA will look at how firms help people regain control of their debt, as well as examining each company's culture to see whether they are more interested in profit than in the customer.
"We are putting much more stringent affordability criteria in place for lenders, to say you have to take into account whether people can pay, what their free cash flow is, what their income is."
It said the area was a priority because 60% of complaints to the Office of Fair Trading (OFT), which is currently in charge of consumer credit regulation, are about how debts are collected.
The 200 or so payday lenders make up less than 1.5% of the £200bn consumer credit market in the UK.
The lenders' trade body, the Consumer Finance Association (CFA), said its members already offered help to customers in difficulty by freezing interest and charges.
CFA chief executive Russell Hamblin-Boone said: "We have been driving up standards for some time now through our code of practice and from 1 April, there are statutory rules that lenders will have to work to, and I think we will see the worst practices being driven out and only the best lenders continuing to operate."
As part of a wider review of the industry, the FCA has already outlined plans to impose a cap on the amount of interest a short-term lender can charge.
It has also set out rules that would limit to two the number of times a loan can be rolled over, as well as a requirement that lenders must carry out thorough checks to see if customers can afford to take out a loan.