The Financial Conduct Authority (FCA) has outlined how it plans to regulate consumer credit – including payday loans – when it takes over from the Office of Fair Trading next April.
According to the regulator, the proposed regime will provider “stronger protection and better outcomes” for borrowers. Here’s what it has in mind specifically for payday lenders.
Limiting rollovers
One of the biggest problems with payday loans is when a loan isn’t fully paid off at the end of the term, and so is ‘rolled over’ for another month. Thanks to the astronomical interest charged on these loans, your debt can grow to unmanageable levels very quickly.
Last year more than a quarter of payday loans were rolled over. And Citizens Advice found that more than 80% of lenders did not make borrowers who were already struggling aware of the risks and costs of rolling over the loan.
The industry’s representative body, the Consumer Finance Association, requires lenders to limit themselves to three rollovers.
The FCA wants to limit the number of times a payday loan can be rolled over to just two occasions.
The idea is that borrowers who need to rollover more than once are probably in financial strife, and so need help dealing with that rather than seeing their debt continue to grow.
It’s difficult to find too much to fault the regulator with on this one, unless you are in the camp that believes these loans should not be rolled over at all.
Limiting CPAs
Continuous payment authority (CPA) is something payday lenders use to collect their repayments. The lender controls how much is taken from your account, but unlike direct debits there is no protection in place to ensure you get your money back if more is taken by the lender than should be.
It’s an issue that has got many debt charities concerned, as we explained in Beware recurring payments and Continuous Payment Authority. And there’s been a significant jump in the number of complaints about CPAs to the Financial Ombudsman Service, which reported a 75% jump this year. What’s more, in three quarters of cases the Ombudsman finds in favour of the complainant.
[SPOTLIGHT]Now the FCA wants to step in to limit the number of times a lender can attempt to collect payment using a CPA to two.
The regulator believes that, thanks to CPAs, payday lenders are able to collect money even from borrowers who can’t actually afford to make their repayments. As a result, the onus is not on the lender to ensure they only lend to people in a position to pay them back from the outset. There will also be a ban on the use of CPAs to take partial payments.
Personally, given the shady record of lenders when it comes to CPAs, I wouldn’t have been opposed to their use being banned outright by the FCA. Limiting the number of times a lender can attempt to use them is at least a step in the right direction.
Risk warnings and debt help
A “significant concern” for the FCA is that currently adverts for payday loans don’t include a risk warning. Brilliantly, the FCA defines a risk warning as “a warning alerting the consumer to the potential risks”. Thanks for that…
Here’s the proposed risk warning that all payday loan ads would carry:
Think! Is this loan right for you?
Over two million short-term loans were not paid off on time in 2011/12
This can lead to serious money problems.
If you’re struggling, go to www.moneyadviceservice.org.uk for free and impartial help.
The FCA also wants to force lenders to provide borrowers with information on where to get debt advice at the outset, even before their loan can be rolled over, rather than waiting for them to get into trouble.
I’m certainly in favour of the debt advice. But I just don’t see how the risk warning above would make the slightest bit of difference. The whole appeal of payday loans is that you can get the money quickly, with just a few clicks of your mouse. No matter how prominently the warning is displayed, it won’t take much to skim right past it.
Interest rates
One thing the regulator won’t be doing is acting on the rates of interest charged, or how they are displayed. It admitted “concern” that displaying the APR is confusing and potentially meaningless, but said EU law means there’s not a lot it can do. Instead it wants to focus on how those borrowers who do not pay on time are treated.
As for the rates of interest charged, it wants to do more research on how it would impact borrowers once it takes over regulation in April.
What happens next?
These proposed rules will be under consultation until December. If you want to respond to them, you can find contact details on this section of the FCA website.
Once the consultation is over, final rules will be drawn up ahead of the FCA assuming control next year.
What do you think? Do these new rules go far enough? Should there be an interest rate cap? Let us know your thoughts in the Comment box below.