Simon Read: Time to crack down on payday loans
Simon Read is Personal Finance Editor at The Independent. He edits the Saturday Your Money section and writes the Daily Money column and Wednesday’s Midweek Money section in i newspaper. He also writes for the news and business pages of the Independent and i newspaper and is a regular money commentator on TV station London Live. He has won numerous awards including Consumer Finance Journalist of the Year.
Saturday 10 March 2012
Payday loan companies were targeted by MPs this week. An all-party Commons Select Committee poo-pooed plans to tighten up the credit industry's codes of practice. They, probably rightly, pointed out that self-regulation isn't working.
Instead, the MPs demanded new laws to stop companies offering high-cost, short-term credit exploiting the vulnerable. Among their demands were calls for improved transparency so that borrowers would have a clear idea of the type of loan they're taking out and the scale of penalties if they're can't repay on time.
MPs also said it's time lenders were forced to demonstrate they have actually checked that potential borrowers can afford to repay their loans. Indeed, I'd go further and make the high-cost credit lenders write off any loans where they haven't ensured that borrowers can afford the debt.
There was also a call for a limit on the number of times payday loans can be rolled over. Some firms claim that they already operate such a system, but that doesn't seem to stop people getting granted new loans month after month.
One problem, of course, is that it's easy for borrowers to simply go to another lender if their existing firm turns them down. For that reason the payday lenders should set up a central database of borrowers and share information to stop multiple loans being taken out by people who can't afford help. Hard-up people need help, not just rising debt.
The MPs also called for continuous payment authority orders on borrowers' bank accounts to be limited, and debt-collection charges capped. The latter is crucial as debt collectors can add hundreds to a bill, making it even harder for people to get their finances back on track.
There are two more items among the proposals worth mentioning. First was a call for the regulator to be given the power to ban harmful products. Second was the need for a faster system to suspend the licences of dodgy companies. This is paramount. Under the current system, it can take up to two years for a payday lender to be shut down.
We only have to look at the example of rogue credit broker Yes Loans which had its credit licence revoked by the Office of Fair Trading on Thursday. Yet the dodgy lender has 28 days to appeal, during which it can continue to trade and flog its expensive deals.
This is madness. Dodgy practices must be dealt with speedily, rather than firms given notice. The unscrupulous lenders will simply ratchet up their activities and fill their boots as much as they can during the notice period.
The rules under which loans firms can operate are already reasonably tight, but must be tightened further. And the regulator must be given the power to act instantly if they catch anyone breaking the rules.
Two weeks ago in this column I called on the banks to play fair with customers and contact all those who may have been victims of the payment protection insurance (PPI) mis-selling scandal. With their usual flair for ignoring the needs of customers, the banks did nothing.
But the City watchdog – the Financial Services Authority – did pay heed and has written to banks, insurers and brokers ordering them to write to 12 million PPI customers who have yet to make a claim, to tell them they may be due a payout.
The move may lead to banks having to find an extra £6bn, but I have no sympathy. They shouldn't have flogged the often useless cover in the first place. Then, when the scale of the mis-selling was revealed, they should have bitten the bullet right away, rather than using legions of lawyers to delay paying out.
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