BORROWERS taking out payday loans will be better protected under new rules unveiled on Friday – but debt charities in Scotland warn that the changes don’t go far enough.
The Financial Conduct Authority’s (FCA’s) final rules for the consumer credit market outline the steps it will take on assuming regulation of the sector on 1 April.
The overhaul features a crackdown on payday lenders and debt management firms which have been accused in recent years of exploiting struggling households.
Payday lenders will be limited to two loan roll-overs – aimed at preventing loan charges from spiralling out of control – and will be forced to signpost customers to free debt advice.
The number of times that lenders can use continuous payment authorities (CPAs) to take payments direct from a customer’s bank account will also be capped at two. Research suggests CPAs have been abused widely by lenders, leaving their customers without money for food and housing.
The restrictions on roll-overs and CPAs won’t take effect until 1 June as the FCA is giving providers more time to update their systems. June will also see payday loan advertisements carry risk warnings for the first time, with the regulator given the power to ban those it considers misleading.
The new consumer credit rules will apply to all companies offering credit facilities, including retailers promoting store cards and firms offering goods for hire.
Debt management companies are targeted in a range of new measures, including a requirement to ensure creditors receive the debtor’s repayments from the start of a debt management plan. Research has shown that some debt management firms have taken the initial repayments as a fee, allowing the debt to continue growing.
However, the main focus is on the controversial payday lending sector, although there will be no cap on the interest rates they can charge until next year. The FCA is consulting on the level at which a cap should be set, with implementation set for 2 January 2015.
But while the new rules have been welcomed by consumer groups and debt charities, there are fears that debtors remain too vulnerable to payday lenders.
Fraser Sutherland, policy officer at Citizens Advice Scotland (CAS), said: “These new rules certainly add a level of protection for consumers that up until now was flimsy at best.
“Now payday lenders can only make two attempts when taking money from people’s bank accounts. This is a big improvement from the current situation, where CABs across Scotland are seeing clients who have been left with nothing to live on for weeks at a time due to the unfair use of CPAs.”
In recommendations published last November CAS called for roll-overs to be capped at just one and for payday lenders to be fined each time they breach the regulations governing CPAs. But the FCA has stopped short of such severe measures.
The report came on the back of research which revealed that just one in three payday lenders in Scotland carried out checks before giving out loans. The same proportion warned debtors about the implications of rolling over their loans.
“There is a lot more that can be done, and we will continue to press for even tighter regulations and more safeguards,” said Sutherland.
The FCA’s decision to allow two roll-overs has also come under fire from Sharon Bell, head of StepChange Debt Charity Scotland.
“Rolling over short-term loans should be a clear indication to lenders that borrowers are in financial difficulty,” said Bell. “By allowing two, there is a substantial risk that financially vulnerable consumers will be able to build up further unsustainable borrowing”.
The new rules don’t do enough to provide the protection that consumers “so desperately need”, she warned.
“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,” said Bell.