“The clock is ticking” for payday lenders, according to Martin Wheatley. The head of the newly created Financial Conduct Authority has put the sector “on notice” that tougher regulation is on the way. Not a moment too soon.
There is a place for short-term, unsecured loan facilities – in helping meet the cost of a domestic emergency, say, or even simply to ease cash-flow problems. But there is a balance to be struck. Too often borrowers are left paying rates as high as 4,000 per cent, trapped in a cycle of debt as loans are repeatedly “rolled over”.
Since the financial crisis – with recession squeezing incomes and banks wary of lending – the number of payday loans issued each year has shot up ten-fold. But it is estimated that as many as a third of borrowers are left worse off. Damning research from the Citizens Advice Bureau, published earlier this year, also suggests that only a small proportion of applicants are asked to prove they can afford to borrow. Such things are not the hallmarks of an effectively self-regulating industry.
To combat some of the most egregious problems, Mr Wheatley proposes to enforce proper affordability checks, to limit the number of times a loan can be rolled over and to clamp down on misleading advertising. All are more than justified.
The payday-loan industry – the reputable part of it, at least – has responded with cautious acceptance, leading some campaigners to suggest that the new rules cannot be tough enough. Not so. Unsavoury as their services may seem to many, if the likes of Wonga are regulated out of existence, their customers may turn to more dangerous loan sharks instead. And that would be even worse.