Findings from a government survey published today have found that payday lenders are not fully complying with industry standards brought in last year to better protect consumers.
This comes as the Financial Conduct Authority (FCA) has today published its own consultation on the rulebook that the industry should be meeting from April 2014. The results of the Department for Business, Innovation and Skills (BIS) survey showed that:
- nearly a quarter of consumers said they were put under pressure to extend their loan and approximately half of those surveyed said that lenders did not explain the risks to them of doing so
- 1 in 5 customers reported that the lender did not ask about their finances when taking out an initial loan
- when it came to affording a rollover, over 60% of customers said lenders didn’t appear to check their finances
- there were very poor customer ratings on the use of continuous payment authority (CPA). Overall nearly 1 in 3 customers reported that CPA was not clearly explained to them and nearly 60% were not told how to cancel CPA.
Today the FCA is proposing to limit the number of times a high-cost short-term credit loan can be rolled over to 2 and introduce a limit of 2 unsuccessful attempts on the use of CPAs to pay off a loan.
Consumer Minister Jo Swinson said:
This research shows that the industry has failed to self-regulate effectively. We warned the industry months ago that if it didn’t get its house in order we would step in. Now the FCA has come out today and published strong actions which will tackle the problems the market has failed to address.
Checking whether people can afford to take out loans, people being unaware that money can be withdrawn from their bank accounts on a priority basis, advertising and pressure to rollover loans are all issues that still keep cropping up.
Too many people are being offered payday loans too easily and without really understanding the dangers if they can’t afford to pay the money back. We want to make sure that those in financial difficulty can make the right choice for them and in many cases this will mean looking for free debt advice not more debt.
Commenting on the FCA’s consultation, the Minister said:
The FCA has announced tough new rules that call time on unscrupulous payday lenders. Forcing them to lend more responsibly will make a real difference to vulnerable people in difficulty.
One of the reasons payday lenders cause such misery is that they can take control of your bank account and ensure they get paid before your landlord or electricity company. The new rules will put a stop to that. Instead of the current free-for-all where they can access accounts hundreds of times a day, this will be cut to just twice over the course of the loan. The limit on rollovers will help to stop people falling into a spiral of debt.
I’m delighted the FCA is also clamping down on payday loan advertising, forcing ads to carry risk warnings and information on free debt advice.
Following the action Government and the OFT have taken already, 25 payday lenders have left the market since March. Today’s action from the FCA will tackle key areas of concern that we highlighted in our own research published today.
Other findings on industry compliance showed that:
- nearly 3 quarters of consumers said they were not dealt with sympathetically when in financial difficulty and only 14% said they had been told about free or independent sources of advice
- when it comes to understanding the cost of the loan, 97% of customers reported that the cost of taking out the initial loan was clear but that dropped significantly when it came to understanding the cost of extending a loan
- consumers generally rated smaller lenders less well than larger lenders in living up to the code commitments
Over 4,000 people responded to the consumer survey and 44 lenders to the business survey that tested key areas within the codes and charter.
In addition, research by Ipsos MORI on whether consumers understand the costs and risks associated with payday loans from advertising by lenders has been published today.
This shows that consumers felt that the adverts were targeted at vulnerable people, those out of work or unable to understand the terms of payday lending. Today the FCA has said that adverts should carry risk warnings and that lenders should provide customers with information on free debt advice before rolling over a loan.
Citizens Advice Chief Executive Gillian Guy said:
Today’s report is further evidence that payday lenders are not treating customers fairly. Citizens Advice’s own survey finds the industry has failed to improve since the charter was introduced last year. All too often lenders aren’t carrying out proper checks to ensure people are able to pay back the loans and are draining bank accounts without warning, leaving people with little or no money to get by.
Firm rules for payday lenders from the FCA, and strong enforcement of them, are vital to ensure a responsible short-term loans market that works for consumers.
Richard Lloyd, executive director of Which? said:
These damning findings show once again why regulators should move quickly to clean up the credit market. Our research shows that too many people are getting caught in a spiral of debt, often taking out new loans just to pay off other costly credit.
The Financial Conduct Authority must take tough action from day 1 when it takes responsibility for this market next year and in the meantime the Office of Fair Trading must continue its crackdown on poor practice.
Notes to editors
1.The BIS survey, together with a separate survey on payday lending that Citizens Advice has been conducting since November 2012 was carried out to test how the payday lenders have been doing in meeting their voluntary commitments and also to provide additional insight to the state of this market in advance of the Financial Conduct Authority (FCA) taking over the responsibility for consumer credit from the Office of Fair Trading (OFT) in April 2014.
2.Key milestones on industry compliance:
- July 2012: the key payday trade associations representing 90% of the market signed up to a series of new customer protections for consumers taking out payday loans
- November 2012: the customer charter and improved codes of practice were implemented and a commitment made by government to review these codes
- July 2013: the government launched 2 surveys – a consumer survey and a business survey – to assess how well the payday industry is meeting the standards set out in the codes implemented in November 2012.
3.Over 4,000 consumers responded to the consumer survey and 44 lenders responded to the business survey, which ran from 3 July to 14 August 2013. The questions covered every element of the charter and code including:
- clarity of cost and provision of basic information
- acting fairly in dealings with a customer
- extending the term of a loan
- credit assessments
- transparency on loan repayments and continuous payment authority.
The Ipsos MORI research was conducted in London and Sheffield with up to 32 people in 4 discussion groups and 6 face-to-face in depth interviews.
4.The government is also working on viable alternatives to payday lending and has committed investment of up to £38 million in credit unions to increase access to affordable credit for at least 1 million more people and save consumers up to £1 billion in loan repayments by 2019. The government also set up the Money Advice Service to help people make the most of their money, giving money advice to everyone across the UK and to signpost those who need it, to free and impartial debt advice. Advice can also be found on the Citizens Advice website.
5.Continuous Payment Authority (CPA) is a type of regular automatic payment that you can set up using your debit or credit card. It’s a popular method of making regular payments – favoured by many businesses, including gyms, internet service providers and payday loan providers.
‘Rollover’ loans are where customers repay the interest charges owed but postpone repayment of the remainder of the outstanding debt for another loan period (typically a month).
6.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 4 ambitions in the ‘Plan for Growth’, 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.