What will stop those dodgy payday lenders?
The City watchdog is set to publish new rules for high-cost credit firms. Simon Read asks what they should include
The much-criticised payday lending sector is braced for a new shock next week. The City watchdog will set out its new hard-line approach to the regulation of the lenders - slammed by Archbishop of Canterbury Justin Welby earlier this year - when it takes over responsibility for the high-cost credit sector next April.
According to Business and Consumer Affairs Minister Jo Swinson the new rules will include "sweeping new powers to ban products, impose unlimited fines, and order firms to pay money back to consumers".
Up until now payday lenders have been regulated by the Office of Fair Trading which, despite its best efforts to introduce order into the out-of-control sector, has been hidebound by its lack of real power.
Specifically it effectively takes the OFT up to around two years to put a dodgy firm out of business. Saying that, some 19 payday lenders have been shut down after an OFT investigation into the top 50 lenders earlier this year, so the trading watchdog hasn't proved totally toothless.
However the new regulator, the Financial Conduct Authority, should have much stronger powers to act quickly to stop rogue lenders preying on the vulnerable.
But what else should be on the FCA's agenda? Labour MP Paul Blomfield has campaigned against payday lenders in his Sheffield Central constituency and also introduced a private member's bill into Parliament this year to control their activities.
He says curbing some of the misleading advertising used by unscrupulous lenders - in the past they've targeted students and the unwaged - is essential.
"Self-regulation has failed, so 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," Mr Blomfield says. "And we need the rules to be effectively enforced."
National charity Citizens Advice is at the frontline in dealing with dodgy loan firms, and its debt advisers are besieged with victims of high-cost credit companies who have ended up in a disastrous debt cycle after being bombarded with easycash.
"The payday loan industry is openly flouting its own rules," chief executive Gillian Guy told The Independent. "We want to see new rules to force payday lenders to carry out proper credit checks. Multiple roll-overs are often to blame for ballooning debts, so we want a limit on the number of times this can happen."
The charity is also calling for strict new controls on the use of Continuous Payment Authorities, which payday lenders use to collect repayments. "Our research shows that a third of problems with payday loans could be down to their misuse," says Ms Guy. "And we're calling for new rules on advertising, such as an industry-specific code, which could halt a slew of adverts targeting the vulnerable and covering up the reality of life in debt."
She also believes that banks have a role to play in building a responsible payday loan sector. "We're calling on them to offer their customers small, short-term loans to provide a trustworthy alternative to traditional payday lenders."
Which? executive director Richard Lloyd also wants a clampdown on rollover loans. "With nearly a quarter of people taking out a payday loan to pay off other debt, the Government must restrict the number of times a payday loan can roll over and ban excessive charges," he says. "The regulator must also enforce proper affordability checks and clamp down on lenders who break the rules if we are to clean up credit."
One group that has been promoting responsibility in financial services this year is Movement for Change. It has held a series of stunts around the country to highlight how the big banks have let consumers down, and called for moves to create new-look ethical financial institutions.
Acting chief executive Mike Kane said Movement for Change has been working with people across the country to find local solutions to high-cost lending, and that work has grown to the group mounting national campaigns. Specifically they would like the new Financial Conduct Authority to explore the idea of introducing an "harassment hotline".
He says: "This would enable people to call, text or use the web to report incidents when they feel intimidated and harassed by high-cost credit companies, and would give the FCA grounds to investigate bad corporate behaviour and take action when appropriate." He also says that high street banks should be forced to step in and help. "Banks have become over-reluctant to lend," he points out.
Britain's biggest payday lender Wonga refused requests to comment on what it would like the new regulator to do to curb the excesses of unscrupulous payday lenders. That suggests the firm believes that all is well and stronger action is not needed.
With the proceeds from its 5,853 per cent APR short-term loans climbing threefold in just two years, it's understandable that the firm doesn't want regulation introduced that could hit its soaring profits.
But a representative from the payday lending industry did agree to talk to The Independent. Russell Hamblin Boone is chief executive of the Consumer Finance Association, the main trade body for major short-term lenders in the UK, although Wonga has refused to join.
He has helped to push through major reforms for his members that have seen several improvements in the way they do business and a tough code of practice that has attempted to rid the sector of the more dubious techniques adopted by some lenders.
Looking forward he says: "The key for the future is to level the playing field and ensure all payday lenders have to meet the high standards set out in our code of practice. This set of standards alongside the FCA's statutory regulation will drive out irresponsible lending.
"Short-term loans are a positive choice for people from all walks of life as they are extremely flexible and simple so it is critical that the FCA regulates for the majority of customers, not simply to protect a minority of extreme cases who get into financial difficulty."
Other people believe that the existing short-term credit companies have it wrong and there are fairer ways to treat customers. John-Paul Savant is chief executive of Think Finance, which has just launched its own payday lender-with-a-difference, Sunny. The firm uses risk-based pricing to reduce costs to consumers and encourage them to be more responsible.
"Our rates start at the low end of payday loans and drop all the way to less than half of typical payday rates," he says. "If for instance a competitor said it is charging 99p per day per £100 borrowed, our rate would be less than that but, more importantly, could drop to just 50p per day if a borrower demonstrates a strong repayment history."
Amigo Loans offers more competitive-priced deals to borrowers who can use friends or family as guarantors. "Payday loans are fundamentally unhealthy for customers," says boss James Benamor. "Some really fundamental rules need to be put in place, including thorough and meaningful affordability checks and the removal of rip-off fees and charges. But long-term payday firms shouldn't be allowed to compete unless they're genuinely meeting customers' needs."
Carl Packman is an authority on the scandal of payday loans and published a book Loan Sharks: The Rise and Rise of Payday Lending last year. "The payday lending industry may have gone through an OFT investigation and a referral to the Competition Commission - but it still breaks the rules," he says.
"I would like to see a price cap placed on the total cost of credit. The FCA should set it but I would like to see the cap at around £12 per £100 lent." He also wants to see more fines levelled at lenders who break the rules and for the regulator to remove the consumer credit licences of repeat offenders.
He points out that high-cost credit lenders have often had their knuckles rapped for advertising expensive products as affording celebrity lifestyles, most notably when one firm used two-time bankrupt Kerry Katona to flog its high-costloans. "I would like to see lenders' adverts have financial health warnings on them reminding consumers of the risks associated with them," Mr Packman says.
Andrew Hagger, who writes our weekly Money Insider column, has put together a simple list of restrictions that the new watchdog should impose on payday lenders. For a start consumers should only be allowed to roll a loan over once in any 12-month period - and at the same interest rate and no extra fees. "It's the additional fees that really cripple consumers and can be the start of a debt spiral that people struggle to get out of," Mr Hagger says.
He also says lenders should be forced to make customers complete a comprehensive budget planner for every application. and only make funds available next day at the earliest. "I think being able to get the money in minutes appeals to people in a situation where they're not really thinking straight - perhaps gamblers, people needing extra money for a night out when not in a sober state, and so on."
Finally he says that payday lenders should be forced to share information so consumers can't run up debts with multiple companies.
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