Bringing payday lending under control

The announcement by the new Financial Conduct Authority (FCA) of proposed new regulations for the payday lending industry brought a qualified welcome from all sides.

There were five key proposals, which would require firms in the high-cost short-term credit sector to:

  • assess the potential for a loan to adversely affect the customer’s financial situation
  • limit the number of times they can seek payment using a continuous payment authority (ie taking money directly from a customer's account)
  • limit the number of times a loan can be ‘rolled over’ (ie making a new, larger loan that covers outstanding fees and interest)
  • inform customers about sources of debt advice before refinancing a loan
  • put risk warnings on loan adverts.

The middle three proposals have clear and obvious benefits to consumers.

The proposal on advertising will be disappointing to those who believe that the advertising of these loans should be banned altogether.  This possibility was floated by the FCA earlier. but they have retreated to a much more anodyne suggestion. It could reasonably be asked what kind of risk warning could be greater than the current announcement of interest rates over more than 3000 per cent.

The first proposal is also one on which we shall need to hear far more detail.  There is a general assumption among consumers that all financial institutions share a great deal of information about customers.  This is simply not true.  Individual companies have sophisticated computer systems which check a wide range of indicators that they decide are the risk factors they want to assess – but unsecured lenders are in competition with each other, and they do not share sensitive market information.

We look forward to seeing in detail the way in which payday lenders will be expected to assess the potential for a loan to tip a family into catastrophic debt.

For more on the FCA proposals, click here

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