Nine months ago the Financial Conduct Authority (FCA) took over the regulation of the consumer financial credit market from the Office of Fair Trading (OFT). One of the big issues that they decided to deal with first was to reorganise the lenders offering ‘High-Cost Short Term Credit’, payday lenders included. The new rules for payday lenders and other short-term credit providers were set in place in order to achieve the following:
• “To ensure that firms only lend to borrowers who can afford it”
• ” To increase borrowers’ awareness of the costs and the risks of borrowing unaffordably and ways to get help if they have financial difficulties” (Source: FCA)
The new rules for payday lenders came into effect in January 2012
The new rules for payday lenders were created to protect both the consumer as well as the payday loan firm, as long as that company is operating with integrity. One of the goals of the FCA is to ensure that businesses give their consumers a fair deal. Here are some of the changes that the FCA has made:
• Limits on how many times a payday loan can be rolled over. If a consumer cannot repay a payday loan within the time agreed upon, the loan can be ‘rolled’ over into the next month. The problem is that this comes with fees and interest and if left to roll over the loan can double. The interest rate on a payday loan is extremely high as it is only meant to be a very short term loan. The FCA has made new rules that dictate that loans can only be rolled over twice. However, lenders must warn their customers not to take out a short term loan if they cannot afford it and may not be able to pay it back timeously.
• Lenders may not collect more than twice. Payday lenders often use a CPA (Continuous Payment Authority) which allows them to withdraw money straight from your bank account. Even though lenders are supposed to inform you that they are making a withdrawal, not all of them do. The FCA has ruled that lenders may not make more than two failed CPA attempts before they have to contact you.
• Lenders may not collect part payments via CPA. If you do not have money in your account to cover the full debt, lenders may not withdraw part of the balance. The lender must contact you for your consent to withdraw a lesser amount. That protects the consumer from have their account cleaned out.
• Introduction of a risk warning. Payday lenders must display the following risk warning: “Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk” This must be clearly visible on electronic communications as well as all media.
• Lenders must offer information about debt help. Lenders must supply you with free information about how to get help with your debt before you roll over a loan.
These new rules for payday lenders originally came as a bit of a shock to the industry. The payday sector was wrapped in controversy. There is light at the end the tunnel because the new rules for payday lenders have led to the exodus of those companies that were conducting questionable business, and competition and diversity for those who have stayed.