Oct 3 2013
Payday lenders will be forced to carry out affordability checks and will only be able to roll over loans twice under plans for a clampdown announced by the City regulator.
The Financial Conduct Authority (FCA), which will oversee the consumer credit market including payday firms from next April, unveiled a proposed set of rules which will see tougher action on payday firms.
Restrictions will also be placed on the number of recurring payments payday firms are allowed to collect following complaints that they are unexpectedly draining borrowers' bank accounts of cash, and the FCA has promised to ban any adverts that are misleading.
Under the FCA's proposals, payday firms will only be able to make two attempts to use a type of recurring payment called a continuous payment authority (CPA) to have a loan paid off.
Information on where to get free help with debts must be given to every borrower who rolls over a loan and "clear risk warnings" must be displayed on all adverts and promotions along with details of debt advice.
Martin Wheatley, the FCA's chief executive, warned firms that "the clock is ticking".
He said that while payday lending "has a place", loans must only be offered to those who can afford them.
Mr Wheatley said: "Today I am putting payday lenders on notice: tougher regulation is coming and I expect them all to make changes so that consumers can get a fair outcome. The clock is ticking."
The FCA will take over regulation of consumer credit, which covers tens of thousands of firms providing a broad range of services which also include overdrafts, credit cards and debt advice, from the Office of Fair Trading (OFT) on April 1.
Charities have been reporting soaring complaints about payday firms and the whole industry is undergoing a probe by the Competition Commission, which has powers to shake up markets and is due to produce a full report towards the end of next year.
The OFT, which recently carried out its own investigation, found "deep-rooted" problems in the £2 billion sector. It said some firms' business models appear to be based around people who cannot afford to pay their loan back, meaning they are forced to roll their loan over, the original cost balloons and they become effectively trapped with their lender.
The FCA wants to hear feedback from consumers and the industry before a firm set of rules are set out early next year.
Consumer campaigners welcomed the plans but questioned why stronger action has not come sooner.
Martin Lewis, founder of consumer help website 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."
Richard Lloyd, executive director of Which?, said: "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 Financial Conduct Authority 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."
Mr Wheatley told BBC Radio 4's Today programme that the plans will put a stop to some consumers being able to get the green light for a loan in around 10 minutes.
He said : "The fact you can get a loan in 10 minutes means the person lending to you isn't really doing the proper affordability checking.
"It will be a lengthier process and arguably 10 minutes to get money for people who may not have the ability to repay is too short in any case.
"So certainly it will be a more complex process than exists today but it should mean you are not pushing people into a spiral of debt, which is what we want to avoid."
Mr Wheatley said a cap on the total cost of credit is also being looked at.
He said: "We haven't got enough data today to work out whether that would be proportionate or where to place the cap ... there is a place for lending in society. It's not that we want to remove it entirely. What we want to do is to prevent the social damage it is creating for those people who really can't afford the loans."