Through the autumn, Church Action on Poverty supporters mounted a major campaign to persuade MPs and the FCA to adopt our Charter to Stop the Payday Loan Rip-off.
On 8 January, we received a letter in response from Martin Wheatley, Chief Executive of the FCA. He outlines what actions they propose to take, responding specifically to each point our supporters have raised.
Mr Wheatley asked us to share his response with our supporters. You can click here to download his letter in full, but here are the key points:
As you are aware, responsibility for regulating consumer credit will transfer from the Office of Fair Trading (OFT) to us in April. Ahead of the transfer we have consulted on our new rules for all consumer credit firms. The consultation closed on 3 December and we are now considering all the responses we have received.
We are proposing specific new rules for payday lending and other forms of high-cost short-term credit. These proposals have two main aims: ensuring that firms only lend to borrowers who can afford it; and increasing borrowers’ awareness of the costs and risks of unaffordable borrowing. I set out our thinking below:
- Checking if the customer can afford the loan: our rules will require that loans should not be given to people who cannot realistically afford to pay them back. The OFT guidance for firms on how they should check whether a customer can afford a loan says that lenders should check their customer’s other financial commitments, including bills and other loans, before lending to them. However, the OFT’s own research shows too few firms implement this guidance. We will therefore put it into our rules and guidance, and will have stronger powers to enforce it.
Your members suggest we specify a limit on the amount a customer can borrow such that the customer’s repayments are no more than a third of their income. We have not currently proposed a limit along these lines, and would be required to consult again if we were to introduce this rule. At the moment, we do not have enough information to understand what the full impact of such a rule would be, or whether it would be needed once we have introduced our other reforms. When we get our powers in April we will consider whether we should introduce any further changes to better protect consumers.
- Rollovers: we intend to stop loans rolling over too often by capping the number of times they can be rolled over to two. Lenders will also have to be able to prove that rolling a loan over even once is in their customer’s best interest. The customer will have to agree to the rollover, and they will be given information on where to get free debt advice.
- Continuous Payment Authorities: some firms repeatedly access borrowers’ bank accounts. They can do this using a ‘continuous payment authority’ (CPA). We have consulted on restricting the use of this kind of payment so the lender can only make two attempts to withdraw money, and only to allow them to take full payment. This should force lenders to make better lending decisions, because they will not be able to easily take money from customers who cannot afford the loan. Lenders will also have to set out when they will use the CPA and whether further attempts may be made to collect payment.
- Advertising: adverts often make borrowing look easy, when for some paying a loan back is going to be tough. We propose making payday loan adverts include a warning which will remind potential customers that many people do not pay back loans on time and that this can be costly. Adverts will also include a line directing customers to free, independent, debt advice. Where adverts are misleading, we have the power to ban them.
In addition, the Government has given us a duty to cap the cost of credit. The duty was formally established through the Financial Services (Banking Reform) Act 2013. As we said in October, when we published our proposed regime for all consumer credit activities, we need to gather more information before we can cap the cost of credit. This is a complex issue and there are many different aspects to consider to set a cap that works well for the UK market. That means researching it, economic analysis and then publicly consulting on its use. We will also consider the lessons of other countries that have adopted this power, to ensure that any cap is right for UK consumers.
Finally, there has been some debate about how best to bring about data-sharing. As set out in our recent consultation paper, this is an area of interest to us. We have said that we will work with the industry to overcome the obstacles to real-time data-sharing through credit reference agencies. If the industry cannot overcome the obstacles, and we are best placed to bring about data-sharing, we will not hesitate to act.
We would like to thank everyone who supported this campaign action. You have helped to make a real difference for the thousands of people on low incomes who are currently being exploited by rip-off lenders.