1 Introduction |
1. In February 2012, we published our Report on debt
management. That Report consideredamong a wide range of
issuesthe 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.
We also recommended that the Government give particular attention
to the following areas:
- limiting the rolling-over of
- requiring the introduction recording of all loans
and the use real-time data-checking;
- reconsidering the use of the Continuous Payment
Authority by payday loan companies as the method for receiving
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
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 organisationsCitizens
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
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 disposalincluding, 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. 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
- 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 costin some cases making claims that,
if true, would amount to irresponsible lending.
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.
Of the fifty companies highlighted by the OFT, 19
informed the OFT that they were to leave the payday market.In
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.
Another three lenders have also surrendered their
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.
PAYDAY LOAN CHARTER
8. In November 2012, the associations covering payday
lendingConsumer Finance Association, the Consumer Credit
Trade Association, the BCCA, or the Finance & Leasing Associationissued
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
- 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
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
- 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.
Role of the Financial Conduct
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
All advertisements and other promotions must
be clear, fair and not misleading. The FCA will be able to ban
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.
11. In a press release to accompany the consultation,
the FCA set out its approach to regulation of the payday loan
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.
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.
The FCA is expected to publish its final rules and
guidance in February 2014.
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 creditwe're looking at the whole package, not just the
interest fee, but also the arrangement fees as well as the penalty
13. The Official Opposition also announced that it
would consider a ban on daytime advertising.
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
HC (2010-12)1649, para 48 Back
HC ( 2010-12)1649, para 58 Back
HC (2010-12)1649, para 67 Back
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
www.oft.gov.uk/shared_oft/Credit/oft1481.pdf, page 2 Back
www.oft.gov.uk/shared_oft/Credit/oft1481.pdf, page 2 Back
Qq 41 and 63 Back