Payday Loans - Business, Innovation and Skills Committee Contents


1  Introduction

Background

1. In February 2012, we published our Report on debt management. That Report considered—among a wide range of issues—the payday loan sector. Our Report urged action to address the failings in consumer protection in this sector in terms of both advice and regulation. We urged the Government to "act swiftly" should the Office of Fair Trading (OFT) compliance review of payday loan companies find evidence of non-compliance.[1] We also recommended that the Government give particular attention to the following areas:

  • limiting the rolling-over of loans;[2]
  • requiring the introduction recording of all loans and the use real-time data-checking;[3] and
  • reconsidering the use of the Continuous Payment Authority by payday loan companies as the method for receiving payments.[4]

2. In its Response, the Government told us that the OFT had been charged with reviewing:

    Levels of compliance with the Consumer Credit Act and the extent to which businesses in the payday sector are meeting the standards set out in the OFT's irresponsible lending guidance.[5]

In addition to this review, responsibility for regulatory oversight of the sector will pass to the Financial Conduct Authority in April 2014. In advance of the formal handover, the FCA is in the process of conducting a review of the sector. The publication of the OFT compliance review, and the FCA's review provided us with a opportunity to return to this matter.

3. We took oral evidence from the Consumer Finance Association and the Consumer Credit Trade Association, who represent, among others, payday loan companies. Each Association brought with them one of their members, Quickquid and Mr Lender respectively. Wonga also gave evidence, as one of the largest payday lenders. The invitation to these particular payday lenders to appear does not necessarily indicate that they epitomise the worst aspects of the sector.

4. We also took evidence from consumer organisations—Citizens Advice, Which?, StepChange and Martin Lewis from moneysavingexpert.com, who provided us with their research and insight into the payday loan sector. This was followed by the Office of Fair Trading, the Financial Conduct Authority and Jo Swinson MP, Minister for Consumer Affairs at the Department for Business, Innovation and Skills.

Recent Developments

OFT REVIEW

5. In March 2013, the OFT published its compliance review of payday lending. In an overview, the OFT stated that:

  • "The payday loans market is not working well for many consumers. Our review has found evidence of widespread non-compliance with the Consumer Credit Act and other legislation. Payday lenders are also not meeting the standards set out in our Irresponsible Lending Guidance".
  • "We are particularly concerned by the evidence of irresponsible lending; too many people are given loans they cannot afford, and when they can't repay are encouraged to extend them, exacerbating their financial difficulties. This is causing real misery and hardship for a significant number of payday users".
  • "During the course of our review, debt advisers, complainants and consumer representatives have told us that problems in this market are continuing to grow. We have listened and we are determined to tackle these issues. We have made payday lending a top compliance and enforcement priority. We will use all the powers at our disposal—including, if appropriate, the power to suspend a credit licence".
  • "To drive up standards in the sector and to remove those lenders whose actions make them unfit to remain in the market".[6]

6. The OFT's key findings were:

  • Around a third of loans are repaid late or not repaid at all.
  • 28 per cent of loans are rolled over or refinanced at least once, providing 50 per cent of lenders' revenues.
  • 19 per cent of revenue comes from the five per cent of loans which are rolled over or refinanced four or more times.
  • Debt advisers reported that borrowers seeking help with payday lending debts had on average rolled over at least four times and had six separate payday loans.
  • 30 of the 50 websites examined emphasised speed and simplicity over cost—in some cases making claims that, if true, would amount to irresponsible lending.[7]

7. On 18 September 2013, the OFT announced that:

Fifty leading payday lenders, accounting for 90 per cent of the market, were each given 12 weeks by the OFT to prove they have addressed areas of non-compliance identified during the payday lending review.[8]

Of the fifty companies highlighted by the OFT, 19 informed the OFT that they were to leave the payday market.In addition:

Three firms engaged in payday lending have had their licences revoked after their appeals against OFT determinations were either dropped or struck out by the First Tier Tribunal.[9]

Another three lenders have also surrendered their licences.[10]

We note that all three of our witnesses were part of the review, and all three were required to make amendments or adjustments to their working practices as a result.[11]

PAYDAY LOAN CHARTER

8. In November 2012, the associations covering payday lending—Consumer Finance Association, the Consumer Credit Trade Association, the BCCA, or the Finance & Leasing Association—issued a Good Practice Customer Charter. The Charter aimed to address failings in the industry. The Charter sets out the standards for member companies in their dealings with customers.

9. The obligations in the Charter are set out below:

When providing payday or short-term loans, we will:

  • Act fairly, reasonably and responsibly in all our dealings with you.
  • Not pressurise you to enter into any loan agreement or to extend ('roll-over') the term of your existing loan agreement.
  • Tell you that a payday or short-term loan should be used for short-term financial needs and is not appropriate for long-term borrowing or if you are in financial difficulty.
  • Tell you how the loan works and the total cost of the loan (including an example of the price for each £100 borrowed, together with fees and charges) before you apply.
  • Check whether the loan is suitable for you taking account of your circumstances.
  • Carry out a sound, proper and appropriate affordability assessment and credit vetting for each loan application and before the loan is extended (rolled over), to check you can afford the loan.
  • Explain in general terms what types of information we will consider in making a decision, if you ask us to.
  • Explain how we will communicate with you during the term of the loan, how payments will be deducted from your bank account and how you can contact us by phone, email or online.
  • Set out clearly how continuous payment authority works (if we use it) and your rights to cancel this authority, so you can decide if this type of repayment is acceptable to you. We will remind you that if you cancel, you will still owe any outstanding debt and will need to provide an alternative method of repayment on the due date to avoid going into default.
  • Always notify you by email, text, letter or phone at least 3 days(1) before attempting to recover payment using continuous payment authority on the due date. This notice will ask you to contact us if you are in financial difficulty and cannot repay.

In respect of financial difficulties, the Charter states that companies will:

  • Deal with cases of financial difficulty sympathetically and positively and do what we can to help you manage what you owe.
  • Freeze interest and charges if you make repayments under a reasonable repayment plan or after a maximum of 60 days of non-payment.
  • Tell you about free and independent debt counselling organisations who can also help you.

It also covers the handling of complaints:

  • [Companies will] tell you about our complaints-handling procedure when you take out a loan or whenever you ask us to. We will also include details about our complaints procedure on our website or make them available at our business premises (where appropriate).
  • [Customers] may be able to refer your complaint to the Financial Ombudsman Service.[12]

Role of the Financial Conduct Authority

10. Responsibility for the regulation of payday loan companies will transfer from the OFT to the FCA on 1 April 2014. On 3 October 2013, the FCA published its consultation on a new regulatory regime for the sector. The key elements of the proposed consumer credit regime are as follows:

    Affordability checks for every credit agreement to ensure that only consumers that can afford a loan can get a loan.

    All advertisements and other promotions must be clear, fair and not misleading. The FCA will be able to ban misleading adverts.

    Firms that do higher risk business and pose a greater risk to consumers will face a tougher supervisory approach. Specific rules for the payday sector have been proposed and include.

    Limiting loan rollovers to two.

    Limiting the number of attempts by a payday lender to use CPAs to pay off a loan, to two.

    Information on where to get free debt advice will be given to every borrower that rolls over a loan; and

    Clear risk warnings to be displayed on all adverts and promotions along with more information about debt advice.[13]

11. In a press release to accompany the consultation, the FCA set out its approach to regulation of the payday loan sector:

    The proposed regime will allow the FCA to provide stronger protection and better outcomes for consumers than the existing OFT regime. There will also be tougher requirements for payday lenders, including a mandatory affordability check on borrowers, limiting the number of loan roll-overs to two, and restricting (to two) the number of times a continuous payment authority (CPA) can be used. There will also be tighter restrictions on what payday lenders can say in adverts, while the FCA will be able to ban any that are misleading.[14]

Martin Wheatley, the FCA's chief executive, made it clear at that time that payday lending would be subject to stringent oversight by the FCA:

    Today I'm putting payday lenders on notice: tougher regulation is coming and I expect them all to make changes so that consumers get a fair outcome. The clock is ticking.[15]

The FCA is expected to publish its final rules and guidance in February 2014.[16]

Other proposals

12. In advance of the FCAs publication on new rules and guidance, both the Government and the Official Opposition have put forward proposals to tighten regulation of the sector. On 25 November, the Treasury announced that it would amend its Banking Reform Bill to introduce a cap on the cost of payday loans. In a press release the Chancellor of the Exchequer said:

    We're going to have a cap on the total cost of credit—we're looking at the whole package, not just the interest fee, but also the arrangement fees as well as the penalty fees.[17]

13. The Official Opposition also announced that it would consider a ban on daytime advertising.[18]

14. We welcome the increased focus, across the political spectrum, on the payday loan sector. Both the Government and the Official Opposition are aware that changes need to be made in this area. While we welcome these initiatives, we believe that further action, including stronger regulation, is necessary to protect consumers.


1   Business, Innovation and Skills Committee, Fourteenth Report of Session 2010-12, Debt Management, HC1649 para 44 Back

2   HC (2010-12)1649, para 48 Back

3   HC ( 2010-12)1649, para 58 Back

4   HC (2010-12)1649, para 67 Back

5   Business, Innovation and Skills Committee, First Special Report of Session2012-13, Debt Management: Responses to the Committee's Fourteenth Report of 2010-12,HC 301 Back

6   www.oft.gov.uk/shared_oft/Credit/oft1481.pdf, page 2 Back

7   www.oft.gov.uk/shared_oft/Credit/oft1481.pdf, page 2 Back

8   www.oft.gov.uk/OFTwork/credit/payday-lenders-compliance-review#.Uqgv9ntFDcs Back

9   www.oft.gov.uk/OFTwork/credit/payday-lenders-compliance-review#.Uqgvx3tFDcs Back

10   www.oft.gov.uk/OFTwork/credit/payday-lenders-compliance-review Back

11   Qq 41 and 63 Back

12   www.cfa-uk.co.uk/assets/files/PD&STL_Charter.pdf Back

13   www.fca.org.uk/news/firms/consumer-credit-detail Back

14   www.fca.org.uk/news/firms/consumer-credit-detail Back

15   www.fca.org.uk/news/firms/consumer-credit-detail Back

16   www.fca.org.uk/news/firms/consumer-credit-detail Back

17   www.gov.uk/government/news/government-to-cap-payday-loan-costs Back

18   www.bbc.co.uk/news/uk-politics-24886804 Back


 
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Prepared 20 December 2013