From April 2014, the payday loan industry will be changing with tighter regulation to crack down on unscrupulous lenders. At present, the Office of Fair Trading regulates the finance industry, however from April 2014 this role will move to the Financial Conduct Authority (FCA).
Ahead of the change, the FCA has outlined what it expects from payday lenders and for many their business practice will have to change.
Changes to Payday Loans
Under new rules starting from April 2014, the FCA will expect all payday lenders to
- Only allow for a maximum of two role over periods. This is the number of times a loan can be taken out. For example, a £100 loan could be repaid at £125 on the following payday. If you couldn't afford the £125 this would "roll over" and the loan would continue but the level of debt would increase too. Some companies allow for continual roll over of loans so the debts continue to increase. The worst example we have experienced at Debt Support Trust was a £700 loan which turned into £12,000!
- Signpost people who roll over loans towards a free debt advice service. This will help people get impartial debt advice if they need it.
- Make risk warnings clearer on marketing materials.
- Stop payday lenders taking money unfairly out the banks of consumers.
- Conduct affordability checks for every single loan to ensure the person borrowing the money can in fact afford the loan.
It's understandable that the FCA would want to place restrictions on the short term loan industry as complaints about untrustworthy lenders grow. While many payday lenders may act ethically, many do not. This is a concern when large numbers of people are using short term lending. Research from consumer group Which? shows that almost 1 million households take out a payday loan every month and that almost 40% are using the money for every day essentials such as food.
Payday Lending Criteria
It's fair to say that many payday lenders follow the above criteria already, so the changes being implemented will remove the unethical element of the payday loan industry.
MPs such as Stella Creasy have been campaigning vigorously for tighter regulation and the changes from the FCA certainly bring us closer to a fairer short term consumer credit market.
However, some people question whether it goes far enough or if more should be done to restrict payday lenders. The FCA said in response to the question, should the interest and charges to capped? "We will look at issues [relating to capping] once we take over in April", so there's scope for the FCA to go further with their power.
The changes are a welcome sign and greeted positively at the charity. Our charity already supports some payday lenders with their indebted clients and we will continue to work alongside the ethical short term lenders to support their business and providers money advice, where necessary, to people with payday loan debts.