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Payday lenders must make checks
Payday lenders will be forced to carry out affordability checks and will only be able to roll over loans twice under plans for a clampdown announced by the City regulator.
The Financial Conduct Authority (FCA), which will oversee the consumer credit market including payday firms from next April, unveiled a proposed set of rules which will see tougher action on payday firms.
Restrictions will also be placed on the number of recurring payments payday firms are allowed to collect following complaints that they are unexpectedly draining borrowers' bank accounts of cash, and the FCA has promised to ban any adverts that are misleading.
Under the FCA's proposals, payday firms will only be able to make two attempts to use a type of recurring payment called a continuous payment authority (CPA) to have a loan paid off.
Information on where to get free help with debts must be given to every borrower who rolls over a loan and "clear risk warnings" must be displayed on all adverts and promotions along with details of debt advice.
Martin Wheatley, the FCA's chief executive, warned firms that "the clock is ticking".
He said that while payday lending "has a place", loans must only be offered to those who can afford them.
Mr Wheatley said: "Today I am putting payday lenders on notice: tougher regulation is coming and I expect them all to make changes so that consumers can get a fair outcome. The clock is ticking."
The FCA will take over regulation of consumer credit, which covers tens of thousands of firms providing a broad range of services which also include overdrafts, credit cards and debt advice, from the Office of Fair Trading (OFT) on April 1.
Charities have been reporting soaring complaints about payday firms and the whole industry is undergoing a probe by the Competition Commission, which has powers to shake up markets and is due to produce a full report towards the end of next year.
The OFT, which recently carried out its own investigation, found "deep-rooted" problems in the £2 billion sector. It said some firms' business models appear to be based around people who cannot afford to pay their loan back, meaning they are forced to roll their loan over, the original cost balloons and they become effectively trapped with their lender.
The FCA wants to hear feedback from consumers and the industry before a firm set of rules are set out early next year.
Consumer campaigners welcomed the plans but questioned why stronger action has not come sooner.
Martin Lewis, founder of consumer help website MoneySavingExpert.com, said: "Parasitical payday lenders have taken over our high streets in the last five years. Our lax rules have made the UK a crock of gold and they've flooded in from across the world.
"For those of us who've been crying out for a crackdown, this hardcore regulation, while not perfect, is very welcome.
"Yet the Government should be shamefaced it's taken this long and even now it'll be next year before the FCA has the authority to make this work."
Richard Lloyd, executive director of Which?, said: "Our research shows millions of people are increasingly reliant on high cost loans to pay for essentials or to repay other debts, so it's good to see the Financial Conduct Authority planning to take tough action to clean up credit.
"We welcome proposals to tackle unscrupulous payday lenders but we want the regulator to go further and use its full powers to clamp down on problems faced by struggling consumers across the credit market, like sky-high penalty charges."
Mr Wheatley told BBC Radio 4's Today programme that the plans will put a stop to some consumers being able to get the green light for a loan in around 10 minutes.
He said : "The fact you can get a loan in 10 minutes means the person lending to you isn't really doing the proper affordability checking.
"It will be a lengthier process and arguably 10 minutes to get money for people who may not have the ability to repay is too short in any case.
"So certainly it will be a more complex process than exists today but it should mean you are not pushing people into a spiral of debt, which is what we want to avoid."
Mr Wheatley said a cap on the total cost of credit is also being looked at.
He said: "We haven't got enough data today to work out whether that would be proportionate or where to place the cap ... there is a place for lending in society. It's not that we want to remove it entirely. What we want to do is to prevent the social damage it is creating for those people who really can't afford the loans."
Labour MP Stella Creasy, who has campaigned against payday loans, told the BBC she would not be declaring victory following the announcement of the FCA's proposals.
She said people would be "horrified to hear just how happy the legal loan shark industry is".
Ms Creasy, referring to a Citizens Advice Bureau study of payday lenders, said: "When 76% of these companies are shown to be lending in a way that would have cause to go the financial ombudsman, if we don't act now to change this, this is going to the next PPI (payment protection insurance) scandal - I am convinced of it."
Russell Hamblin Boone, of the Consumer Finance Association, which represents the interests of major payday loan businesses, said a cap on interest would lead to more people turning to illegal lenders.
He said proper checks of customers to make sure they can pay back loans are in place and can be done quickly, similar to any kind of credit product.
He added th ere has been a cap preventing people from rolling over their loans more than three times.
On a potential interest limit, Mr Hamblin Boone told Today: "I think you look around globally at other markets and see what's happened, France and Germany for example - three times more people being driven to illegal lending.
"Australia has just introduced one and they've seen a growth in the illegal lending market. We are in close contact with the Australian lenders out there where they have put a blanket cap across the whole country and it is causing problems because quite simply people want much more convenience, they don't want the complication and unfortunately they are turning to the convenient illegal lenders."
The FCA came into being in April and its tough powers will allow it to impose stronger protections for consumers. The FCA can step in quickly and sort out problems, impose unlimited fines and compel businesses to give people their money back when they have lost out due to poor treatment.
The change in regulation will see the new consumer watchdog take on responsibility for more than 50,000 firms.
Outlining its general vision, the FCA said it wants to ensure consumers are able to make informed choices, that the consumer credit market is competitive and that people in difficulty are treated fairly.
All adverts and promotions must be clear, fair and not misleading. The FCA will ban adverts that do not come up to scratch.
Firms that are considered "higher risk" will generally come under tougher scrutiny.
The FCA also said that the fledgling peer-to-peer lending market, which involves websites matching people who want to invest some cash with borrowers, must explain the key risks of a loan before an agreement is made and assess the creditworthiness of borrowers. It said that a 14-day cooling-off period should allow the borrower to withdraw if they change their mind.
A consultation is open until December 3 and the FCA will publish its final rules and guidance in February.
Unite general secretary Len McCluskey criticised the Government's "shameful failure to act swiftly" and called for a cap to be placed on the interest rates that payday lenders can charge.
He said: "These measures are too little too late and will do nothing to stop people falling prey to shady parasitic practices of payday lenders over the coming months.
"They tinker at the margins and do nothing to address the reasons people fall into hardship and the clutches of payday lenders.
"Our own research shows that people are being sucked into a spiral of debt and borrowing an average of £660 to get by, pointing to an urgent need to clamp down on the eye-watering interest rates these payday vultures charge."