Today’s news on payday lending is welcome, but enforcement matters as much as legislation

The campaign to tackle the payday lending sector has been gifted another small victory today as the Department for Business, Innovation, and Skills publishes a report calling for more focussed regulatory attention to the sector.

Payday lenders

The campaign to tackle the payday lending sector has been gifted another small victory today as the Department for Business, Industry, and Skills publishes a report calling for more focussed regulatory attention to the sector.

Today’s publication draws on several recommendations the governmnent and Financial Conduct Authority should carry out, including:

– Limit the number of times that payday loans can be rolled over to just one;

– Introduce stronger constraints on the use of Continuous Payment Authorities to stop lenders raiding the bank accounts of people in financial difficulties; and

– Require payday lenders to enter details of their loans on a real-time database to prevent lenders from making multiple loans and continually refinancing existing debt.

These are to sit alongside the recent call by the Treasury to put a cap on the total cost at which a payday lender can charge into legislation.

However the criticism here is that with exception of the cost of credit, all of these issues that BIS are calling for focus on have been consistently overlooked by regulators since campaigners started to raise attention of the payday industry. Our concern is with the new regulator: will these issues be overlooked again?

Checking a borrower’s affordability, not misusing the continuous payment authority, and rules on advertising have been obliged of payday lenders since the OFT began regulating consumer credit. The problem was not lack of rules, but lack of enforcement. We need to be certain that regulators do their jobs properly.

We only have to look abroad to see where even with regulations in place payday lending can still flourish.

In Ohio, USA, a great victory for campaigners against irresponsible lending occurred in 2008 when enough signatures were gathered to win a referendum that capped the costs at which payday lenders could charge.

A ballotpedia page reads:

“The Ohio Payday Lender Interest Rate Cap Act, also known as Issue 5, was on the November 4, 2008 ballot in Ohio as a veto referendum, where it was approved. This statute puts a cap on interest rate payday lenders can charge at 28 per cent.”

In Gary Rivlin’s excellent book Broke, documenting the early rise of the poverty industry, he catches up with Allan Jones, one of the first and well known payday lenders in the US. Despite working out that he made around $10,000 an hour in 2008, he was fuming at the prospect of losing more from the Ohio vote.

He had already shut down forty of his ninety four stores there, which represented around $720,000 of his potential profits. But don’t sound your tiny violin too loudly just yet.

As one recent report by Sheryl Harris, a respected consumer journalist in Cleveland, put it:

“For the last five years, payday lenders have simply continued doing business as usual in Ohio without interference from regulators.”

The notion that, as reported “legislators had some sort of unspoken understanding that payday lenders would simply continue to issue payday loans: two-week loans that carry interest rates of 391 percent or higher” – should remind us that the important thing is often not just legislation, but enforcement.

So while I am happy that there is now a cap on the cost of credit being discussed and decided in the UK, as well as a focus on rules and regulations of the payday lending industry by BIS, we still have reason for caution.

3 Responses to “Today’s news on payday lending is welcome, but enforcement matters as much as legislation”

  1. Damian

    As you say in Ohio when caps were introduced the lenders just carried on as normal.For 5 years.Enforcement is the key.The CFPB in America does seem to be getting to grips with things or trying to.But so much money involved.Donations and power.Money for influence has to come to mind.
    Shame the payday lenders have another Christmas to drain the pockets of the public in the UK.Hopefully the FCA may move quicker than expected and act earlier.Who really knows.And enforce these caps.
    Hopefully the credit unions will power up and help as well.
    There is clearly a need for short term credit there is no getting away from it.
    Some Credit Unions now offering payday loans at mates rates and expected to go nationwide next year.I compared the leading payday lender to a Credit Union payday loan of £400 over one month the saving was £108.00
    Cost of living,many issues pushing people to use the payday lenders.
    I only hope people will begin now to realise how good the Credit Unions could be if they use them.
    A touch more on the Ohio story.
    Capping the costs of payday loans: regulation lessons from Ohio

    While I’m happy that there is now a cap on the cost of credit being
    discussed and decided in the UK, I look at Ohio and realise that though
    they have had price ceilings on the cost of credit for five years,
    lenders have been ignoring them.

    This is yet another issue that we in the UK can learn from the US on predatory lenders and their regulation.

    Capping the costs of payday loans: regulation lessons from Ohio

    http://www.carlpackman.com/blog/2013…ons-from-ohio/

  2. Warren Stephen

    Yes you are right author. Enforcement matters as much as legislation. Thanks for this useful blog.

  3. Mark barlett

    The most common issue is misusing the continuous payment authority, that’s why there must enforcement matters as much as legislation

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