PAYDAY lenders face a crackdown from financial regulators with tougher rules that will stop loans being granted in minutes and make it harder for companies to take money out of customers’ bank accounts.
In future, lenders will have to carry out “affordability checks” before handing out loans while companies will be forced to place risk warnings on their promotions and advertising, urging consumers to “think” before taking out a payday loan.
Lenders will also only be able roll over unpaid loans twice to stop borrowers sinking into a spiral of debt.
The proposed new rules, which will come into force next year, aim to combat soaring complaints about the £2bn sector, which has doubled in size in the last few years and is used by an estimated two million customers.
But campaigners warned the new rules from the Financial Conduct Authority (FCA) are still not strong enough.
Sheffield Central MP Paul Blomfield, who is pushing a Bill through Parliament to tighten restrictions on payday lenders, said: “I’m pleased that the FCA has recognised the issues that I was raising in my High Cost Credit Bill, but their proposals don’t go far enough.
“We need tougher controls on payday advertising – with clear ‘health warnings’ and signposts to free debt advice on all adverts.
“Affordability checks need to be matched with mandatory real-time data collection and we need lending limits.”
The new rules follow action taken by the six councils covering West Yorkshire and York which recently banned all access to payday lender websites from their computers including those used by the public in libraries and contact centres.
FCA chief executive Martin Wheatley said the plans will put a stop to some consumers being able to get the go-ahead for a loan in around 10 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.”
The FCA 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.
Promotions by payday firms will 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.
Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents short-term lenders, said restrictions on payday firms in Australia had led to more people turning to illegal lenders.
He also rejected the link between the time taken to approve a loan and whether it is affordable.
Mr Hamblin-Boone said: “Our 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.”