New rules announced for payday lenders
Payday lenders will have to carry out checks to ensure borrowers can afford the loan they apply for, the City regulator has announced.
From April 1 the Financial Conduct Authority (FCA) will take over the regulation of consumer credit and has already revealed a number of new policies designed to deal with unscrupulous companies charging sky-high interest rates.
Under the new rules, it will be able to force payday lenders to carry out affordability checks on potential customers, limit the number of loan rollovers borrowers can make to two and restrict the number of times a lender can attempt to use a continuous payment authority (CPA) to two as well.
Lenders will have to tell customers how to get free advice about their debts and the FCA will also be able to ban any adverts for payday lenders found to be misleading.
Chief executive of the Citizens Advice Bureau Gillian Guy welcomed the move but said the success of the rules will depend on whether they are enforced.
"Payday lenders are acting as a law unto themselves flouting regulation and showing a complete disregard for their own promises they made to customers," she said.
"High interest rates, unexpected fees and the draining of bank accounts are driving consumers deep into debt. It is encouraging the FCA has listened to Citizens Advice's recommendations about the industry and taken on board our clients' terrible experiences with lenders
but the job is not done yet.
"The industry needs to be regulated with an iron fist by the FCA strongly enforcing the new rules. The misuse of continuous payment authorities is one of the most damaging factors in payday lending. Bank accounts are raided without warning leaving people penniless meaning they're unable to pay to travel to work or buy food.
Debt charity StepChange said it experienced an 82% jump in the number of people seeking their help because of payday loans in 2013.
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.