Payday lenders have signed up to new rules that aim to protect vulnerable borrowers taking out short-term loans.
Four trade associations, representing 90% of payday and short-term lenders, have signed up to the new voluntary code of practice.
The payday loan market has exploded since the recession started as more consumers feel the pinch. However, it has been slammed by debt campaigners and consumer groups for taking advantage of struggling borrowers and forcing them into a spiral of debt by failing to make adequate affordability checks, charging sky-high interest rates (over 4,000%) and rolling over debts.
Under the new code, lenders agree to:
- Give clear information on the price of borrowing, including fees and charges
- Use robust affordability checks to ensure borrowers are able to repay debts before they are rolled over
- Freeze interest and charges for borrowers who are in financial difficulty and using a repayment plan, or after 60 days of non-payment
- Notify borrowers before taking payments out of their account
However, the consumer body, Which? says the new code of practice was little more than a 'rebranding' of existing rules which had continually been flouted by some unscrupulous lenders.
Richard Lloyd, executive director of Which?, says: "If this code is to be worth the paper it's written on, far more needs to be done to enforce the rules and protect vulnerable people who are getting caught in a downward spiral of debt. We welcome more robust credit checks but also want to see a cap on the amount that lenders can charge for defaults and an end to extortionate fees."
Sarah Brooks, director of financial services at Consumer Focus, is equally critical: "Many of our concerns still remain: will affordability checks be robust enough to ensure that companies are lending responsibly and are there fair processes in place to deal with consumers that get into repayment difficulties."
She adds: "The codes are silent on key issues such as the misuse of continuous payment authorities to make repeated attempts to take money out of an account and whether a credit check forms part of the loan approval process. There also appears to be no independent monitoring of compliance with codes."
The Office of Fair Trading (OFT) is carrying out its own review of the payday loan market and is expected to publish its findings by the end of the year. The government is also considering whether the OFT should be granted the powers to suspend credit licences from lenders that have been found to have flouted the rules.