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New rules in payday loan clampdown
Payday lenders will be banned from rolling over loans more than twice under new rules to clamp down on poor practice announced by the City regulator.
The Financial Conduct Authority (FCA), which takes over regulation of the consumer credit market from April 1, unveiled a finalised set of rules that will be imposed as it toughens up on poor practice.
Mandatory checks will be introduced to make sure someone taking out a payday loan can afford it and the number of times a payday firm will be able to attempt to try claw money back out of a borrower's account using a recurring payment known as a continuous payment authority (CPA) will be restricted to twice.
A limit of two will be placed on the amount of times that a loan can be rolled over and f irms will also be required to give customers information on how they can get free debt advice.
Martin Wheatley, the FCA's chief executive, said: "Millions of consumers access some form of credit each day, from paying for everyday goods by credit to taking out a payday loan. We want to be sure that the market works well when people need it - whether that's for one day, one month or longer.
"Our new rules will help us to protect consumers and give us strong new powers to tackle any firm found to be overstepping the line."
The FCA will also have powers to ban any adverts by payday lenders which are found to be misleading.
It has promised to apply "hands on" supervision of how firms treat their customers, particularly in those sectors considered "higher risk" such as providers of credit cards, debt management and payday loans.
It warned there will be "swift penalties" for any firm or person found not to be putting consumers' interests first, including the threat of enforcement action and consumer redress.
Around 50,000 firms currently make up the £200 billion-a-year consumer credit market, which is currently overseen by the Office of Fair Trading (OFT).
FCA regulation will apply to firms offering overdrafts, credit cards and personal loans, selling goods and services on credit, offering goods for hire, or providing debt counselling or debt adjusting services to consumers.
The OFT carried out a probe into payday lenders last year, which resulted in a referral to the Competition Commission after "deep-rooted" problems were found. The Competition Commission is set to produce a report into payday firms later this year.
The Commission recently released a progress update, in which it said it had found that less than two-thirds of payday loans were fully paid back on time or early.
Evidence has emerged that some payday firms appear to have been basing their business models around people who cannot afford to pay their loans back in time, meaning the original cost of the debt balloons and the borrower ends up rolling the loan over and sinking into deeper trouble.
Earlier this week, the StepChange debt charity reported evidence that payday loans are still causing "widespread harm and misery", despite efforts by the industry to make improvements to affordability checks and the treatment of customers with problem debt.
StepChange said it had nearly 14,000 cries for help last year from people who were struggling with five payday loans or more.
Under the new rules, toughened checks will be carried out on any person or firm trying to enter the consumer credit business to make sure their business models are "suitable and sustainable".
Payday lenders will have to provide financial health warnings online and in other electronic promotions and signpost people to free debt help as soon as the FCA takes over consumer credit from April.
Consumers will be told: "Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk."
Payday firms will have to include risk warnings in other forms of advertising, such as print and television , from July 1.
Rules relating to loans being rolled over and continuous payment authorities will also come into force from July 1, to give firms time to adjust their computer systems for the changes.
The clampdown will also require debt management firms to pass on more money to creditors "from day one" of a consumer setting up a debt management plan, which should help people to clear what they owe earlier.
The FCA said it would normally expect "no more than half" of any payment from a customer from the first month of a debt management plan to be allocated to the firm's fees and charges, including its set-up costs.
It said that, although some firms may incur increased costs, consumers will receive a direct benefit if their debts are repaid earlier.
Craig Gentle, PwC's consumer credit lead and financial services risk and regulation partner, said the new rules " set the scene for the biggest overhaul of the consumer credit industry in four decades".
He said: "While a lot of focus has been on payday lending, it is important to remember that this not only affects financial services providers, but all companies that provide credit facilities ranging from retail store cards to second- hand car dealerships and dental practices."
The firmed-up rules follow a consultation paper released by the FCA last October, which received around 300 responses.
The FCA will consult this summer on proposals that a cap should be placed on the cost of a payday loan.
It is also working with the industry to encourage "real time" data-sharing between lenders before a loan is granted, to give firms the most up-to-date picture possible on whether or not a borrower can afford to take on their debt.
This would make it easier to flag up potential problems, such as if someone had tried to take out multiple loans within a short space of time.
Richard Lloyd, Which? executive director, welcomed the FCA's "tough approach".
He said it is good to see the regulator taking on " firms that have been exploiting millions reliant on high cost credit to pay for essentials".
Mr Lloyd said: "Lenders should not wait for the new rules to take effect before changing their behaviour.
"Borrowers must be treated fairly whatever form of credit they're using, so the regulator must clamp down on excessive fees and charges, particularly default fees charged by some payday lenders, to show it means business."
Joanna Elson, chief executive of debt charity the Money Advice Trust, said mandatory affordability checks have the potential to prevent much of the harm it sees.
She said: "It is important these are rigorously enforced."
Russell Hamblin-Boone, chief executive of the Consumer Finance Association (CFA), which represents short-term lenders, said: "Clarity and consistency are the keys to the success of this regulation. We now have some clarity for lenders and borrowers, but the rules have to be enforced consistently across all short-term lenders.
"The CFA has been at the forefront of the industry, driving improvements and raising standards in order to pave the way for the FCA's regulation."
Consumer campaigners said more still needs to be done to protect payday loan customers.
Wendy Alcock, campaigns manager at consumer help website MoneySavingExpert.com said: " Payday lenders have got away with too much for too long and the FCA must keep its word when it comes to cracking down on this broken market.
"But this is not the end. We're still waiting for the total cost cap and our call for a ban on payday loan adverts from children's TV is yet to be answered by the Government or regulators.
"Until all the problems with high-cost short-term credit are addressed, people need to look after their own pockets."
StepChange's head of policy Peter Tutton said: " We continue to see problems related to irresponsible lending, spiralling debts and the unfair treatment of those in financial difficulty and it remains unclear as to whether these rules will truly fix these issues."
Financial Secretary to the Treasury Sajid Javid welcomed the rules as another "milestone" towards creating a stronger and safer financial services sector to support businesses and families.
He said: "A well functioning consumer credit market is key to this. That is why the Government has created the Financial Conduct Authority and provided it with the powers to act decisively to tackle bad practice and consumer detriment in areas like payday lending."