The U.K. Financial Conduct Authority warned payday lenders over risky loans, saying companies should consider "affordability risk" before giving out loans to customers.

In a "Dear CEO" letter dated Oct. 15, the regulator said lenders must assess the creditworthiness of clients before signing agreements or significantly increasing credit limits. The so-called "affordability risk" refers to the risk of the borrower being unable to repay loans, the FCA said.

Lenders should consider clients' ability to repay loans out of their income without having to borrow to meet repayments, without failing to meet other payment obligations and without the repayment causing a significant impact on the clients' financial situation.

The FCA also urged lenders to monitor regular customers, saying that repeated borrowing "is likely to be relevant in assessing the level of affordability risk and deciding whether a more rigorous assessment may be needed, potentially involving additional data and/or verification."

Jonathan Davidson, the FCA's supervision director for retail and authorizations, said companies must also assess if their creditworthiness assessments are compliant. Davidson also warned payday lenders on how they handle complaints, in light of increasing complaints over unaffordable lending.

The regulator's action comes a few months after Wonga Group Ltd. was placed under administration amid a rise in customer compensation complaints that jeopardized the company's solvency.