FCA gets its claws into payday loans

The Financial Conduct Authority isn't officially responsible for consumer credit yet, but it's already drawn the battle lines against payday lenders.

by Emma Haslett
Last Updated: 11 Nov 2014

The Archbishop of Canterbury isn’t the only critic of payday lenders: the government has been itching to get its claws into the industry for years. Now it looks like it will have its way: the Financial Conduct Authority has drawn up new plans which would put tighter regulation around the industry. Not that it’s the first one to have tried this...

Under the measures, payday loans companies will have to issue debt warnings, a bit like mortgage companies (or peanut packets that say 'may contain nuts'), in their ads - and if the FCA still doesn't like their ad campaigns, it will be able to ban them.

Companies will also be limited on how much they can lend: they will only be able to 'roll over' a loan twice, and if they can't get the cash out of a person's account first time using a Continuous Payment Authority (an alternative to a standing order/direct debit), they'll only be allowed to try once more before they have to give up.

‘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,’ he said. ‘The clock is ticking.’

Consumer affairs minister Jo Swinson added: ‘It’s suddenly going to be in their interest to only lend to people who can afford to pay it back’. Not that lending to people who can’t afford to pay it back is particularly in their interests – as far as we know, losing money isn’t part of their business model.

Lenders have taken it well: the Consumer Finance Association, to which many of the remaining 200 lenders belong (which has already imposed its own rules on payday loans firms), called the measures 'an opportunity to set a bar over which irresponsible lenders will struggle to jump'.

Despite that, when it comes to regulating payday lenders, we're still catching up with the likes of Europe and the US, which have already introduced strict measures against them. Although we've already taken baby steps: the most dastardly firms were shut down by the Office of Fair Trading earlier this year, when it wrote to lenders asking them nicely whether they were 'suitable' to be in business. 19 companies withdrew from the market as a result, and another six have stopped operating since.

When the FCA replaces the Financial Services Authority as the industry's regulator in April, it will also decide whether to impose a cap on the amount of interest companies can charge.

If payday lenders are going to protest, that's when it'll happen: many argue that because of the length of the loans they offer (the average is about a month), without the astronomical-sounding interest rates they charge, they wouldn't make any profits. So expect the big argument to happen then. By comparison, these rules are small fry.

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