Payday lenders must act more responsibly or face being put out of business under new rules that come into force tomorrow.
Crucially, high-cost credit companies have been banned from rolling over loans more than twice after it emerged that lenders were making half their profits from rollovers.
But encouraging people to rollover loans again and again – sometimes as much as 12 times - boosts lenders’ profits and increases the debt woes of hard-up people, putting them closer to financial difficulties.
Payday firms have also had a limit on how many times they can attempt to take money from borrowers’ bank accounts under controversial continuous payment authorities (CPAs).
The CPAs give lenders access to people’s bank accounts and have been used to drain them of money, leaving people in financial hardship.
Now payday firms can only make two attempts to claw money out of people’s accounts using a CPA. Lenders must also include “risk warnings” on television adverts from today.
Companies which break the new rules have been warned they face losing their credit licence, which effectively puts them out of business.
Meanwhile the payday lending industry is under investigation by the Competition and Markets Authority. It has called for an independent price comparison website to be set up to help people compare payday loan costs, after discovering that borrowers are being charged around £60 a year over the odds for loans.
Mike O’Connor of the StepChange Debt Charity said: “The payday lending industry has shown it cannot put its own house in order. The Financial Conduct Authority should go further to fix this market where abuse is causing real damage to people.”