Today's announcement was a long time coming, but we are still left waiting for strong regulation over this controversial industry. How much longer can this go on?
With the regulation of the payday lending industry we have come a long way in recent times. From the day this country got its first branch of The Money Shop in 1992 up until way into the noughties, the financial danger of high cost credit hadn’t even entered the political radar.
Some vital work has taken place in recent times on the high streets, in parliament, and academically to show the extent to which this type of credit product can be harmful for consumers.
The Financial Conduct Authority has today set out detailed proposals for its consumer credit regulatory regime, which it takes over in April 2014 from the Office of Fair Trading and the Financial Services Authority.
These have developed from intense unhappiness about the current regulatory set up. At a recent fringe event at the Liberal Democrat conference, Jo Swinson, minister for consumer affairs, said: “We recognise that the Office for Fair Trading doesn’t have significant enough powers, they can’t force lenders to listen and guidance is just guidance.”
What the FCA have published today is a direct response to that. Martin Wheatley in the executive summary puts it:
“We have put the spotlight on payday and other high-cost short-term lending because we must take action to help those consumers most at risk … Our message to any company that harms their customers – the clock is ticking.”
But does this go far enough?
Limiting the attempts to drain money from the accounts of borrowers with use of the continuous payment authority is a great way to stop lenders tearing up the finances of its users.
Also obliging lenders to show risk warnings on the advertising of short term, high cost credit is a must.
The requirements to provide consumers with an information sheet including for free debt advice is absolutely key.
However, is this the strongest possible response to an industry which continued to lend to people irresponsibly even when they were under an investigation by the OFT? Or when it was found that there was widespread lending to drunk people, under-18s, and people with severe mental health trouble? Or an industry who last year received the most complaints to the Financial Ombudsman Service – excepting for PPI? Or an industry whose prices do not seem to be going down even with a complete market swamping, therefore rendering the usual rules of competition null and void?
We need a cap on the total cost of credit. The FCA report today says the evidence so far is ambiguous. But that’s namely because the research made on it in the UK looked at restrictions in general, not the operability of a total cost cap specifically.
A cap, the price of which should be determined by the regulator, should be placed to give lenders a break-even rate. It was found recently by the London Mutual Credit Union that short term lenders could break even with loans made with much lower fee costs if they extended their payback terms. If they can do it why can’t payday lenders?
We also need to prohibit rollover loans, not reduce them to two. What is the motive here? Payday lenders have profit incentives to lend people just a little bit more than they can afford so as to keep them coming back as return customers – this is where they make their money.
The 28 per cent of rolled over or refinanced loans in the UK payday lending sector provides around 50 per cent of their total revenue. We need a regulator that disallows this kind of incentive. Not one which tinkers round the edges.
Many US and Canadian states, for example, prohibit rollovers. These loans, where one loan is taken out to service an existing one, is from the get-go a sign of financial trouble. Their request should trigger the need for immediate free, impartial debt advice. The FCA missed the chance to install such a thing today.
Also, there is no mention of a real-time database which can clock the number of payday loans being taken out at any time. With use of something like this – which they have in Florida, for example – we would be able to log information and stop people from being able to take out numerous loans from different lenders in one go.
This must also be a trigger point for free debt advice and referrals to better credit products like that from credit unions.
And finally, the FCA should take over as soon as possible. At the moment its new regulation begins April 2014, but on top of that there’s a three month lag which means no changes will occur until July 2014. We’ve been waiting too long for regulation “with teeth”, and we’re still waiting.
Today’s announcement was a long time coming, but we are still left waiting for strong regulation over this controversial industry. How much longer can this go on?
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