Payday lenders face a crackdown by the UK financial watchdog which is worried about the exploitation of vulnerable customers.
The Financial Conduct Authority (FCA) has announced new regulations for payday lenders designed to prevent consumers from spiralling into heavy debt.
Under the new rules, lenders must make sure that the borrower can repay the debt before the loan is made and they will only be allowed to roll it over twice.
The FCA takes over regulation of the consumer credit market, which includes payday lenders, in April next year, but chief executive Martin Wheatley says:
“I’m putting all payday lenders on notice: tougher regulation is coming and I expect them all to make changes so that customers get a fair outcome. The clock is ticking.”
There has been growing concern over the activities of payday lenders and the alarming rate at which loans can grow if they’re not paid off on time.
The current regulator – the Office of Fair Trading (OFT) – found ‘deep-rooted problems’ in the industry during a recent investigation.
They claimed some firms’ business models appeared to be based on people not being able to afford to pay their loan back which forced them to roll it over, increasing the amount of debt they were in.
Since then 19 lenders have withdrawn from the market and another six have either stopped offering payday loans or have had their licences suspended by the OFT. But the FCA says the industry is still failing to respond.
There has been speculation that they might ban lenders from advertising altogether, but it now seems they will only have enhanced powers to ban ‘misleading’ adverts.
The regulator has previously said they would consider a cap or limit on the interest rates lenders can charge and that they will consider forcing rogue lenders to reimburse customers where necessary.
It has also said it will be prepared to close down firms overnight if it needs to.
Martin Wheatley says: “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 who can afford it and payday lenders must not be allowed to drain money from a borrower’s bank account. That is why we are imposing tighter affordability checks and limiting the use of both rollovers and continuous payment authorities.”
Richard Lloyd of consumer champion Which? says: “Our research shows millions of people are increasingly reliant on high-cost loans to pay for essentials or to repay other debts, so it’s good to see the FCA planning to take tough action to clean up credit.
“We welcome proposals to tackle unscrupulous payday lenders but we want the regulator to go further and use its full powers to clamp down on problems faced by struggling consumers across the credit market like sky-high penalty charges.”
The Consumer Finance Association (CFA) which represents many of the payday lenders say: “As major lenders in the mainstream market, CFA members have always supported well-designed, well-implemented regulation in order to protect customers and drive up standards.
This is an opportunity to set the bar over which the irresponsible lenders will struggle to jump.”