FCA & Payday Loans

The Financial Conduct Authority (FCA) has plans to crack down on payday lenders from exploiting vulnerable customers. It’s come just in time in my opinion.

From April 2014, payday lenders will have to ensure that their clients are able to repay their debt, PLUS they will only be able to roll over the debt twice.

FCA are also planning to restrict the amount of times lenders can collect from a client’s bank account after complaints from borrowers that they are draining there bank accounts without any warning.

Some people had believed they would ban advertising from the payday lenders however they have enhanced there powers to ban any advertising from the payday lenders which they believe is misleading.

The Archbishop of Canterbury has vowed to ‘compete out of existence’ payday lender Wonga which has made all payday lenders more controversial.

Martin Wheatley chief executive for FCA said: ‘We believe that payday lending has a place – many people make use of these loans and pay off their debt without a hitch, so we don’t want to stop that happening.

‘But this type of credit must only be offered to those that can afford it and payday lenders must not be allowed to drain money from a borrower’s account. That is why we’re imposing tighter affordability checks, and limiting the use of rollovers and continuous payment authorities.

‘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. The clock is ticking.’

Regulators are set to ban firms for exploiting customers who can’t repay their debts.

There are more than 50,000 companies in the UK which offer credit and the FCA will take over responsibilities for regulating them. A final version of the new rules will be published in February as they are subject to consultation for the next two months.

Some of the rules will apply to all lenders though some are specific to payday lenders because of its ‘higher-risk business’.

If a borrower rolls over there debt twice they must be given information on where to seek free debt advice on managing their debt.

Continuous payment authority (CPA) will only be able to make two attempts for payments out the borrower’s bank account under the new proposals from the FCA.

A recent investigation by the Office of Fair Trading found “deep rooted” problems within the payday loan sector which is worth approximately £2 billion.

The Office of Fair Trading recently carried out an investigation into payday loans, finding ‘deep-rooted’ problems in the £2billion sector.

They were concerned that some payday lenders lent money even when they were aware the customer could not afford to repay, this meant they would roll the debt over and the original costs would soar the borrower can quickly become trapped by the lender.

Executive director of Which Richard Lloyd 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.’

The new proposals will mean people will not get accepted for a loan in ten 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.

Mr Wheatley said on radio 4 today ‘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.’

He also said a cap on what people can borrow is 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.’

Stella Creasy an MP for Labour said she wasn’t happy with the tougher controls.

‘If we don’t act now to change this, I’m convinced this is going to be the next PPI scandal,’ she said. ‘People aren’t borrowing for luxury. It’s not that they have options; it’s that people need to pay their rent. I think we have to look at how we make sure people access affordable credit.’

My Opinion

I’m grateful that the FCA is taking on the challenge of regulating the payday lenders. It’s about time and I’ve been talking about it for a while – you all know that I hate payday loans.

We are finally getting towards a sensible program to support both the credit industry and consumers. America has protected consumers with payday short term loans for years and we’re not getting towards a fairer system.

Could it have gone further? YES!

We could have restricted the APR companies can charge, however there’s still time yet.

All in all, a positive win for consumer finance in the UK!

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John The Bankruptcy Guy

As an ex-bankrupt, John has experienced the highs and lows of credit. It's with this knowledge that he writes Debt Advice Resource - to help others avoid, or navigate out of, the pitfalls of debt.

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