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Payday lenders: FCA proposes tougher controls on adverts and rollovers Payday lenders: FCA proposes tougher controls on adverts and rollovers
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Offers of a loan in minutes could become a thing of the past after the City regulator announced a crackdown on payday lenders which will force them to make tougher affordability checks and change the way they extend and collect loans. Payday lenders will be forced to make tougher affordability checks under a crackdown by the City regulator that could stop borrowers being given loans within minutes of applying.
New rules to protect borrowers proposed by the Financial Conduct Authority are designed to ensure that only people who can afford to repay a loan will be granted one. Lenders will be prevented from rolling over loans more than twice to stop charges spiralling, and there will be restrictions on how many times they can try to take cash from a borrowers' bank account. New rules to protect borrowers recommended by the Financial Conduct Authority are designed to ensure that only people who can afford to repay a loan will be granted one – proposals that ministers said would have a profound effect on the sector.
The consumer minister, Jo Swinson, said the changes would have "a profound impact on the industry's risk model", while the head of the FCA said 30% of lenders could leave the market as result. Lenders will be prevented from rolling over loans more than twice to stop charges escalating, and there will be restrictions on how many times they can try to take cash from a borrower's bank account.
The announcement came as research from the government showed that lenders were not meeting voluntary codes of conduct, leaving borrowers under pressure to take on more borrowing and confused by lenders' attempts to reclaim repayments. However, the FCA held back from capping interest charges on an industry whose biggest lender, Wonga, has been castigated by politicians, charities and the Archbishop of Canterbury for charging an APR of 5,800%. The consumer minister, Jo Swinson, said the changes would have "a profound impact on the industry's risk model", while the head of the FCA said 30% of lenders could leave the market as result. It added that up to 30% of consumers who were currently offered loans would lose access to them, and lending could be reduced by up to £750m.
The Financial Conduct Authority (FCA) will take over regulation of the consumer credit market, including payday loans, in April 2014 and has outlined how it plans to govern all types of lenders. The announcement came as research from the government showed lenders were not meeting voluntary codes of conduct, leaving customers under pressure to take on more borrowing.
The chief executive, Martin Wheatley, said: "We believe that payday lending has a place; many people make use of these loans and pay off their debt without a hitch, so we don't want to stop that happening. But this type of credit must only be offered to those that can afford it and payday lenders must not be allowed to drain money from a borrower's account. That is why we're imposing tighter affordability checks, and limiting the use of rollovers and continuous payment authorities." However, the Labour MP Stella Creasy, a leading critic of the payday industry and vocal supporter of interest rate caps, said the new rules did not go far enough. Creasy, who has campaigned against what she calls "legal loan sharks", said the industry had "slipped through the net again".
Its plans for how it will tackle the controversial payday loans industry include limiting the number of times a loan can be extended, or rolled over, to two, and preventing lenders from making repeated use of continuous payment authorities (CPAs) to reclaim repayments. "While I welcome the focus of the FCA on legal loan sharks and their research into capping, the lack of real action again today on the actual cost of credit itself will be a blow for many caught in a spiral of debt due to payday lenders," she said. "The FCA's hands are being tied by a government that consistently speaks out against what most other countries have done to tackle legal loan sharks by opposing capping what these companies can charge."
Currently some lenders hit accounts multiple times in a day, often clawing back whatever they can if there is not enough for the full amount owed; they are preferred creditors, which means they are able to take money from customers before they pay their housing costs or other bills. In future they will have to stop after two unsuccessful attempts and will be banned from trying to collect just part of the planned repayment. The FCA will take over regulation of the consumer credit market, including payday loans, in April 2014 and has outlined how it plans to govern all types of lenders, with new payday lender restrictions to be introduced next July.
Lenders will also have to publish risk warnings on adverts and provide information on free debt advice to anyone who wants to roll over a loan. Current guidance on checking that a borrower can afford a loan before making it will become binding rules. The FCA's chief executive, Martin Wheatley, said: "We believe payday lending has a place; many people make use of these loans and pay off their debt without a hitch, so we don't want to stop that happening. But this type of credit must only be offered to those that can afford it and payday lenders must not be allowed to drain money from a borrower's account."
However, the FCA said lenders needed time to change their practices, so although it wanted to introduce the reforms from 1 April 2014, rules on CPAs and rollovers would not come into effect until 1 July. Its plans for tackling the payday loans industry include limiting the number of times a loan can be extended – or rolled over – to two, and preventing lenders from making repeated use of continuous payment authorities (CPAs) to reclaim repayments from consumers' bank accounts.
The watchdog's proposals were published alongside the results of a Department for Business, Innovation and Skills survey of 4,000 borrowers undertaken over the summer, which showed nearly a quarter of people who had taken out the loans were put under pressure to extend the repayment period. Currently some lenders hit accounts multiple times in a day, often clawing back whatever they can if there is not enough for the full amount owed.
Around two-thirds said the lender did not appear to check their financial position before offering a rollover, almost a third said they had not had the CPA clearly explained to them and nearly two-thirds were not told how to cancel them. They are preferred creditors, which means they are able to take money from customers before they pay their housing costs or other bills. In future they will have to stop after two unsuccessful attempts and will be banned from trying to collect just part of the planned repayment.
Swinson, said the new rules addressed the concerns raised by the research. "People are concerned about the business profiting out of people who take out loans they cannot afford to repay and the FCA rules should stop that – alongside the better affordability checks, if someone can only roll over the loan a limited number of times, the costs will be limited," she said. Lenders will also have to publish risk warnings on adverts and provide information on free debt advice to anyone who wants to roll over a loan. Current guidance on checking whether a borrower can afford a loan before making it will become binding rules.
She added that without lenders sharing real-time data on what loans people had taken, the rules would probably force "some element of slowing down". Wheatley agreed, telling Radio 4: "The fact you can get a loan in 10 minutes means the person lending to you isn't really doing the proper affordability checking. It will be a lengthier process and arguably 10 minutes to get money for people who may not have the ability to repay is too short in any case." However, the FCA said lenders needed time to change their practices, so although it wanted to introduce the reforms from 1 April 2014, rules on CPAs and rollovers would not come into effect until 1 July.The new rules were published alongside the results of a Department for Business, Innovation and Skills survey of 4,000 borrowers undertaken over the summer, which showed nearly a quarter of borrowers were put under pressure to extend the repayment period.
The chief executive of Citizens Advice, Gillian Guy, said: "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." About two-thirds said the lender did not appear to check their financial position before offering a rollover, almost a third said they had not had the CPA clearly explained to them and nearly two-thirds were not told how to cancel them.
Guy said borrowers had been loaned money without proper checks, and some had been left without cash for food after having their bank accounts drained using CPAs. Swinson, said the new rules addressed the concerns raised by the research. "People are concerned about the business profiting out of people who take out loans they cannot afford to repay and the FCA rules should stop that – alongside the better affordability checks, if someone can only roll over the loan a limited number of times, the costs will be limited," she said.added that without lenders sharing real-time data on what loans people had taken, the rules would probably force "some element of slowing down". Wheatley agreed, telling Radio 4: "The fact you can get a loan in 10 minutes means the person lending to you isn't really doing the proper affordability checking. It will be a lengthier process and arguably 10 minutes to get money for people who may not have the ability to repay is too short in any case."The chief executive of Citizens Advice, Gillian Guy, said: "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 squeeze on living standards means people sometimes need a short-term loan to cover unexpected expenses. It's really important that there is a responsible short-term loan market and it's about time traditional lenders, like banks, became part of it," she said. Guy said borrowers had been loaned money without proper checks, and some had been left without cash for food after having their bank accounts drained using CPAs. "The squeeze on living standards means people sometimes need a short-term loan to cover unexpected expenses. It's really important that there is a responsible short-term loan market and it's about time traditional lenders, like banks, became part of it," she said.
The Labour MP Stella Creasy, who has campaigned against what she calls "legal loan sharks" said the industry had "slipped through the net again".
"While I welcome the focus of the FCA on legal loan sharks and their research into capping, the lack of real action again today on the actual cost of credit itself will be a blow for many caught in a spiral of debt due to payday lenders," she said.
"The FCA's hands are being tied by a government that consistently speaks out against what most other countries have done to tackle legal loan sharks by opposing capping what these companies can charge."
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