Tougher controls on payday lenders have been unveiled by the City regulator as it sets out plans to oversee the consumer credit market from next year.
Financial Conduct Authority (FCA) will take on new powers to ban adverts however there will be no new rules governing the often high interest rates charged by the companies.
ITV News Business Editor Laura Kuenssberg reports:
Some of the new rules include:
- All payday lenders adverts and other promotions must be fair, clear and not misleading. The FCA can ban misleading adverts.
- Affordability checks for every credit agreement to ensure that only those who can afford a loan can get a loan.
- Specific rules for the payday sector have been proposed which include; limiting loan rollovers to two, clear risk warnings will be displayed on all adverts and information on where to get free debt advice will be given to every borrower that rolls over a loan.
- A dedicated enforcement team will crack down on poor practice, money laundering and unauthorised business.
- Firms that break the rules may face detailed investigations and tough fines.
Martin Wheatley, chief executive of new watchdog said the proposed changes to how payday lenders can operate is to ensure consumers are given greater protection, specifically to ensure lenders do not "drain money from a borrower's account."
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.
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.
Debt charity StepChange have welcomed today's proposed new rules for payday lenders, saying they were a "crucial move towards a new era for consumer credit."
The charity have helped more than 30,000 people struggling with payday debt in the first half of this year, which is almost the number it dealt with across the whole of 2012. 7,000 of their clients this year are people who have five or more payday loans.
– Peter Tutton, StepChange Debt Charity head of policy
The current regulatory regime has left consumers inadequately protected against poor practice from the payday lending industry.
The FCA's proposals represent a crucial move towards a new era for consumer credit.
Russell Hamblin-Boone, chief executive of the Consumer Finance Association (CFA), which represents short-term lenders, argued that more people would turn to illegal lenders if the cost of credit were capped and defended payday loans saying companies were already checking customer's ability to repay.
Responsible payday lenders apply the same level of expertise to assessing creditworthiness as banks and credit card providers, including carrying out credit checks on new customer applications.
Modern technology means that this can happen very quickly. Our members check thousands of pieces of data during their affordability assessments, but the customer is not asked thousands of questions. That doesn't mean the checks aren't being carried out.