But these firms will now face tougher scrutiny under regulation from the financial watchdog, which says that as many as a quarter of lenders could be forced out of business.
Here’s a look at the new rules and what they mean for consumers.
From April 1, FCA will take over responsibility for around 50,000 consumer credit firms from the Office of Fair Trading (OFT). This includes more than 500 payday lenders.
The FCA will have stronger regulatory powers than the OFT did, and will be able to intervene and take enforcement action against lenders when there is evidence of consumers “suffering due to poor services and products”. It will be able to issue fines, order refunds and ban misleading advertising.
Under the FCA’s new rules, details of which were confirmed last month, payday lenders will have to limit the number of times their customers are allowed to rollover and extend their loans to two instances. Also limited to two instances is the number of times a lender can seek repayment using a continuous payment authority (CPA), which means taking money directly from a borrower’s bank account.
From now on, lenders will also be required to improve their checks on whether or not a customer can afford to repay a loan, and to provide information on how to get free debt advice.
Debt management firms will be required to pass on more money to creditors from day one of a debt management plan, and to protect client money.
While regulation starts from today, many of the new rules will kick in on July 1. All rules for debt management firms will be implemented with immediate effect however.
‘Driving out rogue lenders’
The trade body for payday lenders, the Consumer Finance Association (CFA), said the new rules need to root out the industry’s worst offenders. Russell Hamblin-Boone, its chief executive, said: “The FCA now needs to focus its efforts on the worst practice not just the best-known lenders. We look forward to these rules driving up standards and driving out rogue lenders.”
The FCA also plans a ‘thematic review’ of the way payday lenders collect debts and treat borrowers in arrears. Chief executive, Martin Wheatley said: “Last Christmas over a million people planned to use a payday loan to help with their bills, so the need for transparent and effective regulation of the sector is clear.”
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