Payday lending is back in the news today as two reports are released, one after the other, on changes to the regulatory architecture that oversees the industry. Given how much optimism there was last year with the FCA being given new powers, the meat of these reports will come as a disappointment.
The report by the Office for Fair Trading has said that the leading 50 payday lenders, accounting for 90 per cent of the payday market, has just 12 weeks to change its business practices or risk losing their consumer credit licenses.
As it is, payday lenders compete on the speed at which they lend cash out, not the cost of the credit they sell, which means that the incentive is for them to avoid carrying out sufficient credit checks.
The OFT today have said that it will report the payday lending market to the Competition Commission after finding evidence of irresponsibility between lenders.
In 2010 the OFT’s guidance for creditors on irresponsible lending pointed out that: “All assessments of affordability should involve a consideration of the potential for the credit commitment to adversely impact on the borrower’s financial situation, taking account of information that the creditor is aware of at the time the credit is granted.”
What the OFT now want to do is act upon the already existing regulation where previously it did not have the capacity to enforce its regulation.
In addition to assessments on affordability and credit checking, the other areas of non-compliance include:
. failing to explain adequately how payments will be collected
. using aggressive debt collection practices
. not treating borrowers in financial difficulty with forbearance.
It should be stressed that all of these issues are raised in the guidance set by the OFT, but it just hasn’t had the ability to ensure the regulation is met by the large swathes of new payday lenders on the high street.
This is where the newly created Financial Conduct Authority (FCA) comes in to play. The FCA was set up (it will start operating April 2014) to focus on enforcing current regulation.
Critics of the payday lending industry were given hope when late last year the government did a u-turn and added an amendment to the Financial Services Bill which gave the FCA the power to cap the cost of credit.
But now the government has flip flopped over this point again. A report commissioned by BIS to the Personal Finance Reseach Centre at the University of Bristol has found that a cap to the cost of credit could cause more of a detriment than the issue it sought to solve.
However BIS has said that in principle the debate will still be had on whether a cap will be appropriate. The PFRC research found that at the moment access to credit might shrink and be a problem for borrowers, but the implication is if other measures were carried out by the FCA then a cap may well be possible in the future.
This disappointing news has been offset by a commitment from the government to work more closely with the Advertising Standards Agency to further regulate the advertising of payday loans.
It is not certain what this will look like yet, but those commitments could include adding financial health warnings to adverts, regulating at what time adverts can be shown on TV, how spaced apart adverts are, and a further highlighting of the price a consumer would have to pay.
Given how much optimism there was last year with the FCA being given new powers, the meat of these reports will come as a disappointment.
It was enough for some that the FCA’s powers would begin to operate next year, when consumers are routinely being ripped off now – but the findings in today’s BIS report are surely a step backwards.
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