The days of shoddy payday loan practices could be numbered after the Financial Conduct Authority (FCA) today announced plans to crackdown on the industry.
These short term, hugely controversial loans, which can charge 5,000% APR, have sprung from nowhere in recent years, and are now an industry worth billions. There have been many reports of people taking out a couple of hundred pounds worth of payday loans, but ending up owing thousands if there are any repayment problems (see our Payday Loan Help if you're struggling).
After years of calling for regulation and giving evidence at select committees, with little response from a government that didn't want to shackle business, the reaction from MoneySavingExpert.com creator Martin Lewis to this news is "about bloody time."
The FCA, which takes over regulation of the consumer credit market from the Office of Fair Trading (OFT) next April, has put its new regulations out for a final consultation – there are many new measures included, though it's stopped short of putting a cap on the total costs of these loans.
The new FCA regulations
The FCA takes over credit regulation from the OFT next April. It's turning the OFT's guidance into firm regulation. The new rules are subject to final consultation until 31 December, but are likely to go through unchanged, they include:
- Limiting the number of times a loan can be rolled over to two. Payday lenders use rollovers to continuously extend customer's loans, so while a loan may be advertised as lasting for a month at a small cost, it is often rolled over time and time again and will end up lasting much longer. Some lenders actively encourage those aiming to repay to do this.
The knock on effect is the hideous headline APRs, which many say are meaningless for monthly loans, start to become more relevant as the borrowing length is stretched, rapidly accelerating the cost. The crackdown to only allowing two rollovers should help diminish this.
- Stopping lenders continually grabbing money direct from bank accounts. The number of loan repayments lenders can attempt to take from customer's accounts by continuous payment authority (CPA) is to be capped at two per loan – it can only take more than two payments if another agreement is reached between the lender and customer. Lenders must also only try to take full repayments.
CPAs allow payday lenders to take money from people's accounts whenever they chose to. Some lenders levy tens of CPAs for small amounts, possibly even everyday to constantly suck every penny that someone has coming into their account out before they can use it. This can create substantial hardship. The new rules should revert control of payments from the lender, back to the customer.
- Add a 'wealth warning' to payday loan adverts. A bit like on a packet of cigarettes, although we're yet to find out how this will work in practice. The FCA will also be able to ban misleading payday loan adverts.
- Affordability checks on borrowers. Currently, many payday lenders give money almost willy-nilly, without reference to credit agencies. There is now a requirement to ensure borrowers can afford it.
The FCA's final rules will be published in February next year.
'About bloody time'
MoneySavingExpert.com creator, Martin Lewis, says: "Finally, at last, about bloody time. Parasitical payday lenders have taken over our high streets in the last five years. Our lax rules have made the UK a crock of gold and they've flooded in from across the world.
"For those of us who've been crying out for a crackdown, this hardcore regulation, while not perfect, is very welcome. Yet the government should be shamefaced, it's taken this long and even now it'll be next year before the FCA has the authority to make this work.
"The report card on the changes is as follows: Limiting rollovers to prevent loans ballooning into uncontrollable beasts, good. Cracking down on lenders who daily try to grasp every penny directly from people's accounts by limiting CPAs, good.
"Waiting to see whether a total cost cap is needed, passable. It would've been better to do this straight away, but if payday firms continue their usual ways of operating it'll happen soon – though I could be gloriously surprised and they'll improve.
"Wealth warnings too are welcome if the implementation is right, but of course even more could be done. Banning adverts from children's TV, slowing down the instantaneous access to money so people can't get loans when out on the lash, and better promotion of alternative sources of credit. Yet after years in the desert of regulation, this is at least a good glass of water.
"As for alternatives to payday loans, credit unions are a hope but lack the speed. My suggestion is if you feel at some stage you will have no alternative to getting one, grab a credit card, even a poor credit card at 50% APR, then stick it in a bowl of water in the freezer.
"Having to crack the ice will give you food for thought about using it. If you do use it, simply fully pay it off within a month, as payday loans are designed to be, and it's interest free borrowing."
'Tougher regulation is coming'
Martin Wheatley, the FCA's chief executive, says: "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."
Alternatives to payday loans
Before taking out a payday loan, first consider the alternatives:
- Freeze an emergency credit card for when needed. As Martin explains, having to crack the ice will give you food for thought about using it.
- Use any existing credit card – provided you can clear it all in full the next month it's interest free (except for the Lloyds Advance card).
- Check if you're eligible for interest-free loans and grants from the local council or job centre. (See our Debt Help guide for more information.)
- Get a 0% credit card – even with a poor credit score. (See our 0% Balance Transfer and Spend guide.)
- Check out your local credit union – these are independently-run local co-operative organisations which aim to assist people who may not have access to financial products and services elsewhere.
- Ask if you can you borrow from family or a close friend.
- Extend your overdraft, if you can, but stay within the arranged limit, otherwise it'll cost you big.