New regulations for payday loans companies

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From April 1 2014 the Financial Conduct Authority (FCA) will take over the regulation of the consumer credit industry, including payday lending companies.

In the run up to the start of the new regulatory arrangement, the FCA is both seeking to consult widely and to raise questions and issues about areas of the industry.

The FCA is reporting that there is evidence of a range of problem areas within payday lender practice, dealing with what the body describes as 'high-risk short-term loans'.

The identified problems include:

  • some firms do not properly assess whether a consumer can afford to pay back a loan before lending to them
  • some use continuous payment authorities to take money from customers when they can't afford it
  • some roll over loans repeatedly without taking into account the customer's individual circumstances.

The FCA are proposing rules for payday lenders that they believe will achieve better results for consumers:

  • In respect of 'Clear and Fair Advertising', the FCA propose that all advertisements, which they call 'financial promotions' for payday loans must come with a clear risk warning, highlighting the potential risks of taking out a loan to consumers. This should include information about where to find free debt advice. This warning could help those consumers who are not aware of the costs of not paying back a loan on time.
  • Regarding 'Roll Over Loans' - when customers do not pay off their loans, it is common for payday lenders to roll them over to the following month. This is a simple process that can be useful to customers, as it means they won't default on the loan, or incur additional charges and their credit score won't be affected. However, if lenders use it too much, it can mean that the cost of interest on the loan accumulates. Sometimes charges can be higher than the original loan. Also a number of roll overs may indicate that a customer is in financial difficulty. To protect consumers, the FCA has proposed to limit the number of times a firm can roll over a loan to two. For consumers in this position, lenders will also have to give them information about where they can find free debt advice.
  • The FCA proposes to limit the use of 'Continuous Payment Authorities' which allow a firm to take a series of payments from a customer's bank account without the customer having to authorise it every time. These are often used to collect renewal payments for things like car breakdown services, insurance policies, gym memberships, mobile and broadband services or magazine subscriptions. For payday lending, these authorities are used to collect payment usually on the customer's next payday. However, typical problems include firms trying to take payments unexpectedly, or repeatedly trying to take payments when the customer has already explained that they don't have the money. This gives the firm a level of control over the customer's bank account. The FCA proposes to limit the number of times a payday lender can seek a payment using a continuous payment authority to two, believing that this allows customers some flexibility, while giving them more control to manage their way out of financial difficulty.

Concerning the cost of payday loans, the FCA considered implementing a 'price cap' on the cost of credit by introducing a limit on how much interest payday loan firms can charge on a loan - so how much it costs a customer to have credit. At this stage,  the FCA does not believe that they have enough evidence or information to fully understand the implications of doing this. However, once the FCA starts to regulate consumer credit firms next April, they believe that they will be able to collect more data from businesses, enabling the FCA to carry out more research into the effectiveness of price capping.