Crackdown on payday loan companies
A clampdown on payday lenders which will see an end to firms giving loans the green light in 10 minutes has been announced by the City regulator.
New curbs proposed by the Financial Conduct Authority (FCA) will also limit the number of attempts payday firms can make to claw money back out of a struggling borrower's bank account.
The lenders will be forced to place "risk warnings" on their promotions and advertising, urging consumers to "think" before taking on a payday loan. The watchdog has powers to ban adverts if it thinks they are misleading.
The proposed new rules, which will come into force next year, aim to combat soaring complaints about the £2 billion sector, which has doubled in size in the last few years and is used by an estimated two million customers.
Payday lenders will have to carry out stricter checks to make sure that borrowers can afford to take loans out and they will only be able to roll a loan over twice, to stop consumers sinking into a spiral of debt.
Martin Wheatley, chief executive of the FCA, said that the plans will put a stop to some consumers being able to get the go-ahead for a loan in around 10 minutes.
He told Radio 4's Today programme: "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."
The FCA also plans to limit the number of unsuccessful attempts that lenders can make to try to take money from borrowers' bank accounts, by using a type of recurring payment called a continuous payment authority (CPA), to two.
Under the proposed rules, a promotion by a payday firm will also carry the risk warning: "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."
Consumers will be pointed in the direction of the Government-backed Money Advice Service for help. Payday firms would also need to incorporate this into emails and social media.
Before a firm agrees to roll a loan over, it must explain how the costs will escalate and give free debt advice. Warnings will be similar to those used by mortgage lenders, which remind borrowers that they may lose their home if they fall behind with payments.
The proposals were welcomed by consumer campaigners, although many questioned why tougher action has not come sooner. The new rules will not come into force until next April and breaches will not be enforced before October 1 next year to give firms time to adjust.
The plans, which are being consulted on, were welcomed by the Archbishop of Canterbury, who sparked controversy recently after telling Wonga, one of Britain's best-known payday lenders, that the Church of England wants to ''compete'' it out of existence as part of plans to expand credit unions.
The Most Rev Justin Welby said: "I warmly welcome the new rules proposed by the Financial Conduct Authority and I commend the attention given by them to helping to protect those most at risk from the dangers of an uncontrolled slide into unmanageable debt."
The FCA, which has tough powers to step in quickly and sort out problems, impose unlimited fines and compel businesses to give people their money back, takes over control of overseeing the consumer credit market, including payday lenders, from the Office of Fair Trading (OFT) on April 1.
The whole payday industry is undergoing an investigation 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, including almost one third (28%) of payday loans being rolled over.
Martin Lewis, founder of consumer help website MoneySavingExpert.com, said the Government should be "shamefaced" that the crackdown has taken so long.
Unite general secretary Len McCluskey also criticised the Government's "shameful failure to act swiftly" and called for a cap to be placed on the interest rates that payday lenders can charge.
Russell Hamblin-Boone, chief executive of the Consumer Finance Association ( CFA), which represents short-term lenders, argued that more people would turn to illegal lenders if the cost of credit were capped.
He told Today: "We are in close contact with the Australian lenders out there where they have put a blanket cap across the whole country and it is causing problems because quite simply people want much more convenience, they don't want the complication, and unfortunately they are turning to the convenient illegal lenders."
Speaking later, Mr Hamblin-Boone said modern technology allows payday lenders to process loan decisions speedily and in a responsible way.
He said: "O ur members have no desire to lend to customers who cannot afford to repay a loan.
"That's why responsible payday lenders apply the same level of expertise to assessing creditworthiness as banks and credit card providers, including carrying out credit checks on new customer applications.
"Modern technology means that this can happen very quickly. Our members check thousands of pieces of data during their affordability assessments, but the customer is not asked thousands of questions. That doesn't mean the checks aren't being carried out."