Is there a danger that by handing responsibility to the Financial Conduct Authority for regulating payday loans that you bring them in from the cold?
The FCA, as the name suggests, regulates the conduct of firms covering all sorts of businesses from fund managers and insurers, to banks and financial advisers. The products include mortgages, mutual funds, structured products and pensions.
The FCA is set to cover payday loans from April next year. This week the regulator set out a range of proposals about how it would do so. The law says the FCA has to consult about this sort of thing rather than be seen to be acting arbitrarily, so this is sure to start a big debate but on first reading, the proposals sounds very sensible. They include the following ideas:
Lenders will not be able to extend, or “roll over”, loans more than twice.
This means that people will not simply get used to paying away part of their income. It should mean that at least a proportion of people do not get used to being constantly in debt.
The number of attempts a payday lender can make to take money out of a borrower’s account using a Continuous Payment Authority (CPA) should be limited to two.
This should mean the environment in which lenders claw back their loans gets a little less hostile.
Anyone extending a loan should be told about free debt advice
This does strike us as forcing a cigarette seller to hand out cards for the local oncology specialist, but we suppose it can’t hurt.
The FCA could order lenders to change misleading adverts, or drop products that are not in the best interests of consumers.
This makes sense and is a big improvement on the current situation where it requires complaints to be made. It will be interesting to see how often the FCA will use this power.
Overall this is a welcome move and it might see off a few more cowboy firms. The Office of Fair Trading clampdown earlier this year led 19 payday loan businesses to shut up shop.
But the Government and regulator have decided not to cap the amount charged in interest and to hold this in reserve – that is a missed opportunity.
In the past, the Government has priced capped pensions and is considering a new cap for workplace pensions. The Opposition leader is talking about price capping utility bills on the grounds that competition has failed, though the suggestion is controversial.
We can see arguments both way in terms of pensions because much of the market is actually offering reasonable value. We can see an argument to say that capping energy bills could damage investment. It doesn’t feel like payday loans offer good value not that we need any more investment in the area.
So what isn’t clear is what effective competition would look like in the payday loans sector where the High Streets of many poorer towns in the UK and in lower income urban areas seem to have a lender every 100 yards of so.
These loans, unfortunately meet a demand. But regulators and the Government should accept that they need a price cap to stop many vulnerable people being charged huge amounts and that means setting a tight cap to pull down the average interest charged significantly.
If we have to have these firms because the alternative is that people go to illegal loan sharks, then that simply may be the reality of our economy or society, but we need to keep them on a tight rein.
With a pension, a mutual fund or a mortgage, when these products are sold in good faith and used correctly they usually benefit people substantially. A payday loan is not, in our view, a good thing. At the very best, where people are using them to manage short-term money issues, they bring a limited benefit.
Yet the risk is that under FCA regulation they come to be regarded as just another product. That is certainly the intention of much of their advertising.
The FCA should regard them as a special case and regulate them as tightly as possible.