Payday loans face crackdown

Tough new regulations are set to put a stop to misleading advertising by payday lenders and will limit loan ‘roll-overs’ that can cause borrowers’ debts to spiral out of control.

The announcement by the market regulator, the Financial Conduct Authority (FCA), has been welcomed by critics of payday loans, who say they target vulnerable people and cause severe financial distress.

Payday loans are short-term loans designed to be stop-gap arrangements for those who are struggling to make it through to their next payday.

The amounts on offer usually range from £100 to £300, but can be as high as £1,000. The term of these loans is usually 31 days. Interest rates charged on payday loans can be in excess of 5,800% Annualised Percentage Rate (APR). Lenders claim rates are set at that level because the loans are supposed to be repaid within a very short term.

Under the FCA’s proposed crackdown, lenders won’t be able to extend payday loans more than twice, and any borrower who does extend or roll-over their loan must be told about free debt advice. Consumers will have to undergo affordability checks for every credit agreement to ensure that only those who can afford a loan can get one.

Payday lenders also won’t be able to take money out of a borrower’s account using Continuous Payment Authority (CPA) more than twice. CPA effectively allows the lender to take money from a borrower’s debit or credit card and to change the amount taken whenever they want.

The FCA also said it will restrict what payday lenders can say in their advertisements and will ban any that are misleading.

Martin Wheatley, chief executive of the FCA 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.

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“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.”

The FCA’s proposals will now by consulted on until December 3, 2013, with final rules and guidance to be published in February 2014.

There are no plans to bring consumer credit under the scope of the Financial Services Compensation Scheme, which offers savers’ protection of up to £85,000 per account, per institution in the event that their bank or building society fails, although the FCA said it will keep this under review.

The clampdown on payday lenders has been welcomed by industry experts, although some claim it is too little, too late.

Martin Lewis, of MoneySavingexpert.com said; “Parasitical payday lenders have taken over our high streets in the last five years. Our lax rules have made the UK a crock of gold and they’ve flooded in from across the world. For those of us who’ve been crying out for a crackdown, this hardcore regulation, while not perfect, is very welcome. Yet the government should be shamefaced it’s taken this long and even now it’ll be next year before the FCA has the authority to make this work.

“Wealth warnings too are welcome if the implementation is right, but of course even more could be done: banning adverts from children’s TV, slowing down the instantaneous access to money so people can get loans when out on the lash, and better promotion of alternative sources of credit. Yet after years in the desert of regulation, this is at least a good glass of water.”

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