Payday lenders could face new restrictions on how they advertise and a new code of practice, under fresh plans announced today by Consumer Minister Jo Swinson and Economic Secretary to the Treasury Sajid Javid.
This comes after new evidence shows problems in the industry are harming consumers.
The measures announced today form part of wider government efforts to strengthen the way consumer credit is regulated.
In addition, Sajid Javid and Jo Swinson have also launched a consultation today confirming the government’s intention to move regulation of consumer credit to the new Financial Conduct Authority (FCA) from April 2014, and provided further details of how the new regime will work.
Consumer Minister Jo Swinson said:
The evidence of the scale of unscrupulous behaviour by payday lenders and the impact on consumers is deeply concerning.
The government is committed to tough action to tackle these problems. The Office of Fair Trading’s (OFT) enforcement action will stop payday lenders taking advantage of those in financial difficulty. In April 2014, we are giving responsibility to regulate this industry to the FCA, who will have more rigorous powers to weed out rogue lenders.
The government also wants to see tough action to clampdown on the advertising of payday lending, and will start immediate work on this. The government will work closely with the Office of Fair Trading, Advertising Standards Authority, Committees of Advertising Practice, and industry to make sure advertising does not lure consumers into taking out payday loans that are not right for them.
Economic Secretary to the Treasury Sajid Javid MP said:
With the enforcement action and unprecedented changes to the regulation of consumer credit announced today, the government is sending a clear message to lenders that if they do not comply with the rules, action will be taken.
The government is introducing a fundamentally new approach to regulating consumer credit, which will ensure that irresponsible firms and bad practice will have no place in the consumer credit marketplace. Consumers can have greater confidence that the new FCA will intervene early and decisively in their interests – thanks to its more focused remit, objectives and powers.
An independent research report from the University of Bristol was also published today by government on the impact of a cap on the total cost of credit in the high cost credit market. Separately, the Office of Fair Trading have published today their final report on payday sector compliance. Both reports clearly show there is significant evidence of consumer detriment in the high cost credit markets.
Working together with regulators, the government is announcing immediate, short term and longer term action to tackle problems in the payday market head on, including:
- the OFT now, and the FCA from April 2014, will clamp down on irresponsible practices and in some cases blatant non-compliance by lenders
- the OFT will be putting 50 lenders on notice, demanding they fix the problems within 12 weeks or face consequences
- the OFT is consulting on a provisional decision to refer the payday lending market to the Competition Commission
- government will work with the OFT, the Advertising Standards Authority and industry to bring in new restrictions on advertising and tougher codes of practice as soon as possible
- the FCA will have strong new powers to restrict the form and content of advertising, and has committed to use these powers promptly when it takes charge next year
- the FSA have committed to consider whether there are gaps in the regulation of payday lending that need to be addressed by the FCA from April 2014
- the government is calling in strong terms for the industry to improve compliance with payday lending codes; and to consider whether independent monitoring can be put in place
- to tackle the growing problem of people taking out multiple loans in one day, government will call on industry to make sure that it improves how it shares and records data
- the government will also press for further commitments on continuous payment authority to be set out in industry codes;
- the Consumer Minister Jo Swinson will talk to key members of the industry in person and call them to account and
- ministers have confirmed that they will not impose a cap on credit; however a cap might be appropriate at some point in future which is why the FCA has been provided with specific powers to cap should they deem it appropriate once they take over responsibility for consumer credit in April 2014.
Office of Fair Trading action
The OFT have today published the final results of their investigation.
The 50 lenders on notice account for 90% of the market, after the OFT found problems with how they advertised, charged for, assessed and dealt with loans. They will need to fix the problems in their companies and report back to the OFT in 12 weeks. In each case, if the problems still exist at this point they may be fined or have their licence suspended.
The OFT’s action responds to the findings of their investigation into how well lenders comply with the law, which uncovered serious problems with how loans are advertised, charged for, assessed and processed by lenders.
The OFT have announced that subject to consultation they will be referring the whole payday sector to the Competition Commission for a market investigation. If the Competition Commission find that the payday lending business model is flawed they can place restrictions on the market, including rules on advertising or interest rate caps.
New consumer credit regulator
The new consultation launched by government today sets out the incoming Financial Conduct Authority’s (FCA) new approach and powers for regulating the consumer credit market.
To protect consumers, the FCA will:
- be able to undertake tougher scrutiny of firms entering the market
- be able to respond quickly to developments in the market that put consumers at risk; by making rules that are binding on firms; by using its existing powers to ban products outright, and by ordering misleading adverts to be withdrawn with immediate effect and
- have strong enforcement powers, including the power to make unlimited fines; to prevent individuals setting up in the market, and to ensure that consumers can get their money back when things go wrong.
In addition, important consumer rights in the existing Consumer Credit Act will be carried forward to the new regime.
The new regime has been designed to offer stronger protection for consumers, but also to ensure that the system is proportionate to the different types of firms in the market, and that consumers continue to have access to the credit they need.
The government will make sure that lower risk firms pay lower fees and are subject to fewer regulatory burdens, and that the vast majority of credit firms (which do not hold consumers’ money) are not subject to capital requirements.
Notes for editors
1.The full consultation document can be found here - ‘A new approach to financial regulation: transferring consumer credit regulation to the Financial Conduct Authority’.
2.The period of consultation will run for eight weeks until 1 May 2013.
3.The University of Bristol report and government response
4.The government is transferring consumer credit regulation from the Office of Fair Trading (OFT) to the FCA in April 2014 as part of its wider reform of the financial regulatory regime.
5.The FSA has today published a consultation paper on the framework for the consumer credit regime, which will set out the detail of the proposed regulatory regime and how the FCA proposes to apply its powers to the regulation of consumer credit.
6.To give firms time to adapt to the new regime, the FCA will allow firms two years to meet their full standards for authorisation.
7.The government’s economic policy objective is to achieve ‘strong, sustainable and balanced growth that is more evenly shared across the country and between industries’. It set four ambitions in the ‘Plan for Growth’ (PDF 1.7MB), published at Budget 2011:
- to create the most competitive tax system in the G20
- to make the UK the best place in Europe to start, finance and grow a business
- to encourage investment and exports as a route to a more balanced economy
- to create a more educated workforce that is the most flexible in Europe.
Work is underway across government to achieve these ambitions, including progress on more than 250 measures as part of the Growth Review. Developing an Industrial Strategy gives new impetus to this work by providing businesses, investors and the public with more clarity about the long-term direction in which the government wants the economy to travel.