THE new Financial Conduct
Authority (FCA), which takes over the regulation of the
consumer-credit industry next April, has published a draft of new
"tighter rules" to regulate the payday-loan market.
The new rules were published
last week, as a government study of the financial sector offering
high-cost short-term loans reported that "overall, compliance with
the key provisions of the [industry's own] charter and codes of
practice is not good enough. On none of the key measures tested do
consumers say that industry is complying fully."
The new regulations are set
to come into force in October 2014. They require advertisements for
payday loans to carry "clear risk warnings"; borrowers will be able
to roll over a loan only twice beyond its original repayment date;
and lenders will be barred from making more than two attempts to
take money from their customers' bank accounts using Continuous
One of the main criticisms
of the loans is the high cost of credit. Wonga, the best known of
the payday lenders, has a representative APR of 5853 per cent. In
contrast, the APR on a Barclaycard is 18.9 per cent. But the FCA's
new rules will not impose a cap. The FCA said that "at this stage,
we don't believe we have enough evidence or information to fully
un- derstand the implications of doing this."
The Archbishop of
Canterbury, who has emerged as a figurehead in the battle against
payday lenders (News, 4
October), welcomed the "attention given . . . to helping to
protect those most at risk from the dangers of an uncontrolled
slide into unmanageable debt.
"I especially welcome the
proposed constraints on the Continuous Payment Authority, and will
be watching with interest to see if these will be enough to protect
the most vulnerable in our society."
The regulation of
advertising for payday lenders is currently shared between the
Office of Fair Trading, which deals with the statutory aspects, and
the Advertising Standards Authority (ASA), which deals with wider
issues connected with the self-regulatory Code for Advertising
On Wednesday, the ASA banned
a Wonga radio advertisement that featured a reworded version of the
1950s song "Mr Sandman", because it "gave the impression that a
high-interest short-term loan was not a financial commitment that
required a great deal of consideration". It said that this
impression was "compounded by the claims [in the advert] about the
simplicity of the application process".
It is the second time in
three weeks that a radio commercial for payday lenders has been
banned by the ASA. The Authority has now published new rules
covering payday loans and social responsibility. In them, it says
that advertisers should avoid "heavily promoting" the speed and
simplicity of a loan "while downplaying less positive aspects, and
should not otherwise encourage consumers to rush a decision to
In its new guidance, the ASA
says: "Simply stating that loans are available to low-income
groups, for example people on benefits, is likely to be acceptable.
However, targeting people who could be perceived as vulnerable has
the potential to be problematic."
Responding to the increasing
public concern about the practices of payday lenders, Plymouth City
Council has banned such companies from using its city-centre
advertisement hoardings. It has also joined a number of local
authorities in banning access to the payday lenders' websites from
council computer networks.
"We want to protect the most
vulnerable of people from falling into the trap of borrowing money
at astronomical rates of interest," Cllr Michael Jones, leader of
Cheshire East Council - one of the first to introduce the website
ban - said.
"We took this action after
being inundated by complaints from the public. We've also received
reports from Citizens Advice that they are now dealing with people
under 18 who have been given loans, and some people who may even
have been intoxicated when they signed up."
Next Tuesday, a cross-party
group of MPs, led by the Labour MP for Sheffield Central, Paul
Blomfield, will join a coalition of charities and think tanks,
including Church Action on Poverty, to launch a "High Cost Credit
Charter", seeking stronger regulation.