Payday loans finally face regulation

Borrowers remain vulnerable to rogue payday lenders despite new rules for the market that took effect earlier this week, charities in Scotland have warned.

New rules will apply to moneylenders and payday loan firms. Picture: Getty Images

Payday lenders finally came under the regulatory remit of the Financial Conduct Authority (FCA) on Tuesday, when the City watchdog took on responsibility for the consumer credit market.

However, some payday lenders are already flouting the rules, according to one charity which believes that unscrupulous firms are exploiting low consumer awareness of the changes.

Under the new legislation, payday lenders must subject borrowers to thorough affordability checks and have to signpost customers to free debt advice.

From June the number of times a loan can be “rolled over” will be capped at two, as will the frequency with which lenders can use continuous payment authorities (CPAs) to take payments straight from customer bank accounts.

There will also be a cap on loan charges, although this is currently under consultation and won’t take effect until the start of 2015. Payday lenders failing to comply will be shut down, said the FCA, which estimates that up to one in four firms could be forced out of business under the new regime.

The consumer credit rules apply to all companies offering credit facilities, including retailers, while debt management companies are targeted too.

The FCA has also announced a competition review of the credit card market. Research published by the regulator on Thursday found that nine million people are considered in “serious debt”, with “survival borrowers” relying on credit cards or payday loans to cover their household bills.

But debt charities in Scotland warn today that, while the new rules are welcome, consumers remain vulnerable to payday lenders in particular.

There have already been instances in Scotland this week of payday lenders ignoring the new rules, according to Citizens Advice Scotland (CAS).

“We want to see a market that allows lenders to make a fair profit and offers sensible borrowing options to consumers,” said Fraser Sutherland, policy officer at CAS. “But there must be no hiding place for lenders who flout the rules and operate unfairly. These new rules should make sure that happens and CAB across Scotland are already sending us evidence to highlight to the regulator where lenders are stepping over the line.”

CAS is calling on borrowers in Scotland to come forward with any evidence of lenders breaching the consumer credit regulations now in place. It fears that many consumers unaware of the changes remain at the mercy of rogue payday lenders, however.

“We are concerned where consumers are not aware of these new changes they may fall victim to traders who continue to flaunt the rules,” said Sutherland. “That is why it is so important that the FCA come down hard on those who think they are above the new regulations to protect all consumers to ensure that no-body is left behind”.

Payday loan debts in Scotland have soared in recent years. The number of people turning to payday lenders accelerated last year as government welfare reforms tipped many families over the financial precipice.

Almost one in five people who sought help from StepChange Debt Charity Scotland last year had a payday loan, with an average balance of £1,458. In 2012 just 9 per cent of StepChange clients had a payday loan, at an average balance of £1,398.

Sharon Bell, head of StepChange, which provides free advice, believes the regulator could come down harder on payday lenders. “These new rules affect almost 80,000 firms across the UK and can only offer the consumer better protection,” she said. “We particularly welcome improved policing of the more than 500 separate payday lenders, although feel the new requirements could have been even stricter.”

There are also unintended consequences to watch for, said Marlene Shiels, chief executive of Capital Credit Union in Edinburgh. “For example, limiting a borrower to two roll-over loans per lender might simply send them towards other payday lenders,” she said.

“This won’t solve the problem of multiple debts, and could actually make it worse if they have a zero bank balance, and are hit with multiple charges each time a different lender tries to claim payment.”