4th October 2013
Payday lenders have been falling foul of industry standards brought in last year to protect consumers. A survey from the Department for Business, Innovation and Skills (BIS) survey found that nearly a quarter of consumers said they were put under pressure to extend their loan and approximately half of those surveyed said that lenders did not explain the risks to them of doing so.
In addition, some 20% customers reported that the lender did not ask about their finances when taking out an initial loan and when it came to affording a rollover, over 60% of customers said lenders did not appear to check their finances.
The industry is now set to be regulated by the Financial Conduct Authority from next year.
Consumer Minister Jo Swinson says: “This research shows that the industry has failed to self-regulate effectively. We warned the industry months ago that if it didn’t get its house in order we would step in. Now the FCA has come out today and published strong actions, which will tackle the problems the market has failed to address.
“Too many people are being offered payday loans too easily and without really understanding the dangers if they can’t afford to pay the money back. We want to make sure that those in financial difficulty can make the right choice for them and in many cases this will mean looking for free debt advice not more debt.”
Lloyd adds: “The FCA must take tough action from day one when it takes responsibility for this market next year and in the meantime the Office of Fair Trading must continue its crackdown on poor practice.”
In a bid to protect borrowers the Financial Conduct Authority is proposing to impose far tougher requirements on these fast loan firms, which can charge equivalent APRs of more than 5,000%.
The new rules will including a mandatory affordability check on borrowers, limiting the number of loan roll-overs to two, and restricting, also to two, the number of times a continuous payment authority can be used.
In addition, there will also be tighter restrictions on what payday lenders can say in adverts, while the FCA will be able to ban any that are misleading.
Citizens Advice recently found that three in four payday borrowers were found to have been treated wrongfully and could have grounds for an official complaint to Financial Ombudsman Service.
FCA chief executive Martin Wheatley says: “I’m putting payday lenders on notice: tougher regulation is coming and I expect them all to make changes so that consumers get a fair outcome. The clock is ticking.”
The change in regulation will see the FCA take on responsibility, from the current regulator, the Office of Fair Trading, for more than 50,000 firms who have existing credit licences. The consultation is open until 3 December 2013 and the FCA will publish its final rules and guidance in February 2014.
The Office of Fair Trading (OFT), contacted some 50 lenders earlier in 2013 to ascertain whether they were operating responsibly, and 19 lenders withdrew from the market as a result.
Richard Lloyd, executive director, at consumer rights group Which? says: “Our research shows millions of people are increasingly reliant on high cost loans to pay for essentials or to repay other debts, so it’s good to see the Financial Conduct Authority planning to take tough action to clean up credit.
“We welcome proposals to tackle unscrupulous payday lenders but we want the regulator to go further and use its full powers to clamp down on problems faced by struggling consumers across the credit market, like sky-high penalty charges.”