The payday loans business in the UK is vast and highly competitive. There’s long been controversy surrounding the industry and as a result it would seem that tighter regulation is on the way, regulation designed to better protect the consumer.
As we have said before, used correctly payday loans do have a place in society today – the big question is are they actually being used correctly and, hence, are they being marketed in the right way.
Let’s look at some of the facts as at mid 2013:
- There were 240 payday lenders operating legally within the UK
- The payday loans industry estimated at £2 billion
- Average loan size £270
- High APR rates – often approaching the region of 6,000% (argued that APR does not give a true reflection on the cost of a loan though)
- Highest findings of 12 consecutive loan rollovers (extension of loan for a further period of time – often a month)
- Significant number of people seeking debt help had 5 or more payday loans
And it’s these last points where the particular concern lies – are the payday loans companies checking that the loan is going to be used correctly and that it’s affordable and that’s what the proposed new regulations are suggesting:
- Stricter affordability check to ensure that only those who can afford a payday loan will get one
- Risk warnings to be published on adverts
- A maximum number of rollovers capped at just two to avoid escalation of charges and the payday loans trap
- A free debt advice service for those looking to roll over a payday loan
- Restrictions on how many times a payday lender can try to take cash from a borrowers bank account
- Consideration of a maximum interest rate cap or limit that can be charged
The proposals have been made as a result of government findings which highlighted that payday lenders were not meeting their voluntary codes of conduct and that this was putting pressure on borrowers to take on additional loans.
The Financial Conduct Authority (or FCA) is to formally take over the regulation of all forms of consumer credit from April 2014 from the Office of Fair Trading (OFT) and any regulations will not take effect until July to allow the industry time to adapt. You can find out more about the FCA at their website www.fca.org.uk
Commenting on these proposals the FCA chief executive Martin Wheatley said
“Today I’m putting payday lenders on notice: tougher regulation is coming and I expect them all to make changes so that consumers get a fair outcome. The clock is ticking.”
Government Busines Minister Jo Swinson said that the payday loans industry had failed to self regulate effectively and welcomed the tough new regulations saying that they would
“call time on unscrupulous payday lenders”
Currently many reputable payday lenders belong to the independent trade organisation the Consumer Finance Association who have their own members code of practice which already sets a maximum of three rollovers and a freeze on increasing costs following payment default of 60 days.
Their chief executive Russell Hamblin-Boone confirmed their commitment to protect consumers and drive up standards and commented that the proposals provided
“an opportunity to set a bar over which irresponsible lenders will struggle to jump”
Gillian Guy, the chief executive of Citizens Advice, who all too often find themselves helping people pick up the pieces as a result of debt, said in response
“The new rules from the FCA are essential to stem the tide of predatory payday lenders and protect consumers from unacceptable behaviour from the credit industry.”
The regulation proposals seem largely welcome by all parties (except perhaps the more “unscrupulous” of payday lenders). They are not designed to call time on the payday loans industry or to stop people from turning to the services of payday lenders – doing this will almost certainly provide a boost for the illegal loan shark market which is to be avoided at all costs.
There will now follow a public consultation on the FCA’s proposals which will remain open until early December.