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In 2011-12, the payday loan market was worth between £2.0 and £2.2 billion, up from an estimated £900 million in 2008-09. This rapid expansion has been accompanied by a significant rise in the number of people experiencing serious debt problems as a result of using these products. Earlier this year the Office of Fair Trading conducted a review of the sector and found serious problems with how payday businesses were being run. Its findings made clear to us that consumers were increasingly at risk from this form of loan and that an overhaul of sector was necessary.
The regulation of payday loan companies will pass to the Financial Conduct Authority in April 2014. The FCA has made clear that when this happens, the payday loan sector will be given particular attention. The FCA is already consulting on a new regulatory framework for the sector. Our Report has focused on the key aspects of that consultation and where we believe further action, including stronger regulation, is necessary.
We believe that in addition to more stringent affordability checks, every payday lender should be required to resubmit their affordability tests to the FCA for approval before they can continue to work in the sector. This would ensure that only those companies with appropriate mechanisms for judging affordability would be able to operate in the market.
For too long, the sector has failed to deliver real-time data-sharing. This is vital information to ensure robust affordability checks and to stop customers applying for multiple loans. The FCAneeds to set a final deadline of July 2014 for sector to deliver this. If the sector fails to meet this deadline, the FCA should mandate its use as a condition of trading in the sector.
The use of rollovers has been a particular problem in the sector and has resulted in spiralling debts for many people. The FCA is consulting on a limit of two rollovers for each loan. We believe the FCA should go further and introduce a limit of one.
We agree with proposals to limit to two the number of times a payday lender can use the Continuous Payment Authority. However, information for consumers on its use is not adequate. Three working days notice should be given before a payday lender uses a CPA and all notices should make clear that the customer has the right to cancel.
The rise of broker companies and unsolicited marketing is an increasing problem in the sector, The '7726' short code has been established so that unsolicited texts can be forwarded on to the Information Commissioner's Office. The FCA and the Information Commissioners' Office need to work together to use these services to get a detailed evidence base on the extent of bad practice. If this evidence base demonstrates inappropriate targeting or marketing, the FCA should act quickly to ban all unsolicited marketing or brokering of payday loans through email, texts and other personal mobile devices.
Debt charities and consumer organisations have made clear that the number of people seeking debt advice for payday loans is increasing at an alarming rate. We believe that the levy paid to the FCA should be ring-fenced for the funding of front-line debt services.
The FCA has described its consultation as a "once in a generation change in regulation". Its proposals, together with our recommendations, would deliver a fair but stringent framework which would provide consumers with the protection they need.
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