Moment of truth for payday lenders: Watchdog plans to curb cost of short-term loans
The chief of the City watchdog, Martin Wheatley, spoke exclusively to The Independent's Simon Read about its attempts to control the worst excesses of unscrupulous high-cost credit companies
The final element – at least for now – in the City regulator's attempts to control the worst excesses of unscrupulous high-cost credit companies will be announced next week.
It will reveal plans for a cap on the cost of payday lending.
The aim will be to help more people avoid ending up in a disastrous debt cycle because a short-term loan they've taken out has spiralled out of control due to excessive interest and unfair charges.
Under the plans, the Financial Conduct Authority (FCA) will limit penalty charges and the total cost of credit so that, for instance, someone who borrows £100 isn't forced to repay £500 or other soaring amounts if they default.
The watchdog has already introduced tough new rules this month that payday lenders have to stick to. These include a ban on rolling over loans more than twice.
There is also now a limit of two on how many times lenders can attempt to take money from borrowers' bank accounts under controversial continuous payment authorities, which in effect give them the right to drain those accounts.
The FCA has promised that rule-breakers will be dealt with severely, but it's the payday cap that could cause most problems for lenders, not least because it strikes at the heart of their profitability.
The Government told the FCA last autumn that it had to introduce a cap on top of the other new rules. Since then it has been working hard to put together a practical proposal.
To work out the best way to curb the cost of short-term borrowing, it examined detailed data on 16 million loans from 11 of the biggest payday firms. That included information on revenue, loan costs and the length of time taken to clear the debts. It also looked at caps in other parts of the world, including Australia and the US, and the impact they have had on consumers and firms.
Its aim was to find a solution that allows legitimate lenders to continue their business while curbing the excesses that penalise vulnerable people.
The FCA's chief executive, Martin Wheatley, told The Independent this week that while the watchdog will act quickly against rule-breakers, the new moves are not designed to force lenders out of business.
"The reality is that, despite some politicians and members of the public regarding payday lenders as an evil that should be banned, many people use them and there are legitimate reasons to use short-term high-cost credit, as a million people did last Christmas.
"Our role is to find that balancing point between stopping the excesses which are designed to abuse vulnerable consumers, but still allowing the availability of loans to those who can use them in a mature and responsible way."
When the full details of the cap are published next week, he expects to be attacked from all sides, especially as it won't be a simple cap on the total cost of credit. "Everyone has extreme views on the subject," he pointed out.
The loan cap is likely to be designed to cut back the penalties for those who default, rather than reducing the much-criticised high APRs that are quote by the payday lenders. Wonga, for instance, Britain's most profitable payday firm, now quotes an APR of 5,853 per cent.
After the details of the proposed cap are published next week, the regulator will invite companies and consumer bodies to share their views about the plan, setting a consultation deadline of October.
The cap will then come into force from the beginning of next year, although in the meantime the FCA will be policing the sector with much more draconian powers than were wielded by the Office of Fair Trading, the previous credit regulator which passed on responsibility to the FCA in April.
"We have the ability to do things that the OFT didn't have the ability to do," he said.
The FCA's Martin Wheatley, told The Independent that new moves are not designed to force lenders out of business (AFP/Getty Images)
Mr Wheatley pointed out that in order to get a consumer credit licence to lend money legally, you now have to be regarded as a "fit and proper individual" by the regulator, and it intends to examine all applications closely for those licences.
So someone who has just closed a business, for instance, will fail the "fit and proper" test. That will stop the existing practice of "phoenixing", which involves running a dodgy lending business until the authorities catch up, then closing it down and starting a new one the next day.
Meanwhile, someone with an undeclared criminal background is likely to be deemed as lacking integrity, and that in itself should be enough for them to fail the fit and proper test and be turned down for a credit licence.
But the watchdog will also look closely at business models, and if firms don't meet certain conditions, they will be closed down. "If we think that a firm's business model is a threat to our objectives, then we can refuse to authorise," Mr Wheatley said.
This could help the army of "captive debtors" that end up in the clutches of payday lenders and don't have the money to escape because of the rising cost of their debt.
"If your business model is predicated on lending to people who cannot repay, from my point of view that is a business model condition that we would look very carefully at."
He added: "If somebody's business is making loans, then maybe around 10 per cent get written off and sold to a debt-collection agency, meaning the lender makes no money on them. Then maybe 50 per cent get paid back on time, which they don't make much money out of.
"But where they really make their money is the 40 per cent in the middle which lenders know are going to default, and will then have to roll over their loans. Lenders can then pursue them and have them as captive debtors."
It is these companies that he is now warning: if your profits are mainly based on defaulting borrowers, that's no longer acceptable. And in some cases rogue companies could be prevented from lending immediately.
"We can stop them taking on any new business right away while they attempt to put things right or meet our demands – and we'll use those powers in extreme circumstances," Mr Wheatley said.
Meanwhile, although complaints about payday loans have more than doubled in the last two years, the Financial Ombudsman Service (FOS) warned that the "shame factor" is putting off most consumers from complaining."It's important that people don't feel trapped with nowhere to turn because of the stigma associated with short-term lending," said the principal ombudsman Caroline Wayman.
The FOS received 5,395 enquiries about payday loans in the last financial year and found in the consumer's favour in two-thirds of cases.
It said that disappointingly high numbers of people were unaware that they could speak to the ombudsman if they felt that they were not being treated fairly.
Mr Wheatley said in response to the ombudsman's comments: "Very often the people who are going to payday loan companies are the most vulnerable and not financially the most literate. People need to know the ombudsman service is there before they can take their case to it.
"We know that they walk into debt charities such as Citizens Advice and StepChange a lot because they're on the high street. But we and the ombudsman have the challenge of letting them know that there's a route to get help if they have a problem with a payday lender."
The FOS has warned payday lenders over their poor business practices and called on them to take a positive approach when tackling customers' concerns.
"The fact that most complaints against payday loan companies are upheld is further evidence that when it comes to acting in the best interests of consumers, in many cases they fail to do so," said Mike O'Conner, chief executive of StepChange.
He added that the payday loan industry has been a problem for many years. "Unaffordable lending, the misuse of continuous payments to drain money from customers' accounts, the rolling over of loans and inflating debts with additional charges ... these have been commonplace and damaging."
Last year the charity reported that 66,557 people with payday loans sought its help, an increase of 82 per cent over the previous year.
The ombudsman said the most common cause for complaint was people saying they hadn't taken out the loan, which suggests that fraudsters who apply for payday credit using other people's details may be intensifying their activities.
The FOS is set to publish a report on the payday lending complaints that it receives later this summer.
Crowd-to-let: How crowdfunding sites can give investors a slice of the property market for £500
After the election: What will Britain's financial future look like on 8 May?
General Election 2015: How you vote next week could affect your finances
Beware credit card firms’ odious tricks
10 tips for taking out a personal loan
- 2 Italian police 'reveal' what Jesus looked like as a young boy
- 3 General Election 2015: 14-year-old boy asks Nick Clegg – 'can you kill Katie Hopkins?'
In defence of liberal democracy
Over 50,000 families shipped out of London boroughs in the past three years due to welfare cuts and soaring rents
EU asylum policy is 'a direct threat to our civilisation', says Nigel Farage
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
Schools forced to act as 'miniature welfare states' with teachers buying underwear and even haircuts for poor pupils
iJobs Money & Business
£20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...
£25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...
£215 per day: Ashdown Group: Junior Project Manager (website, web application ...
£40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...
Day In a Page
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings