The Financial Conduct Authority today launched tough new rules to stop payday lenders preying on vulnerable people and forcing hard-up folk into serious debt problems.
Crucially, the City watchdog announced a crackdown on the number of times lenders can roll-over loans – one of the most profitable parts of their business and the main reason why many borrowers get into debt they can’t afford to pay.
There will also be a limit on the number of times lenders can raid borrowers’ bank accounts.
At the moment they can use continuous payment authorities to go back again and again into borrower’s accounts, but that ability will be curtailed by a limit being set on the number of times CPAs can be used.
Lenders will also face harsh fines and closure if their advertising or marketing material is misleading. The hard line should help curtail firms which mislead or cheat borrowers.
The FCA takes over responsibility for consumer credit from next April from the Office of Fair Trading and will publish its proposed new rules this morning.
Because it regulates most of the UK’s financial businesses, it has more power to stop companies ignoring laws.
It can enforce strict standards and stop firms flogging high-cost credit to people who can’t afford it, such as the unemployed or students.
It can also ban misleading advertisements or promotions, and fine or close firms that try to get round the strict marketing rules.
In July, the FCA’s chief executive Martin Wheatley signalled that a possible ban on advertising for payday firms could be in the offing, but he has passed up the opportunity to introduce a total ban.
Labour MP Paul Blomfield welcomed the proposals. “We need tough rules to stop irresponsible advertising, signpost borrowers to debt support, ensure proper affordability checks and lending ceilings, regulate use of continuous payment authorities, and set limits on rollovers and charges that create spiralling debt, and we need the rules to be effectively enforced,” he said.
Citizens Advice Chief Executive Gillian Guy said: “Action to protect consumers from predatory payday lender practices is sorely needed. Adverts promoting payday loans often mask the hardship people experience at the hands of lenders. Controls on advertising would help.”
Richard Lloyd, executive director of the consumer magazine Which?, said he welcomed the moves to limit loan rollovers. “Many people feel they have no choice but to resort to high-cost credit so we need measures to stop irresponsible lending and compel firms to do more to help borrowers in difficulty,” he said.
The country’s most profitable payday lender Wonga refused to comment but Russell Hamblin-Boone of the Consumer Finance Association, which represents the major UK short-term lenders, said: “The publication of the FCA’s Rule Book is an important milestone for the entire consumer credit industry, and an opportunity to set a bar over which irresponsible lenders will struggle to jump.”
The FCA will stop short of putting a cap on the total cost of credit, which many campaigners – such as Labour MP Stella Creasy – have fought for.
Carl Packman, author of Loan Sharks: The Rise and Rise of Payday Lending, said: “While I agree with the FCA that many changes need to take place in the payday lending industry such as new rules of advertising, fines for misuse of the Continuous Payment Authority, and better affordability assessments, this alone is not enough.
“The government and the regulator should work together quickly to set a price cap to stop people – often the most vulnerable people – being ripped off for their borrowing.”
He added: “A recent report by the London Mutual Credit Union found that short-term lenders could break even with loans made with much lower fee costs if they extended their payback terms. If they can do it, why can’t payday lenders?”