Out-Law News 4 min. read

Spotlight on payday lending as Government confirms transfer of regulation to FCA


The Government has confirmed its intention to transfer regulatory responsibility for the payday lending sector to the new Financial Conduct Authority (FCA) from April 2014.

It has published a consultation on how it proposes that the new regime will work in practice, alongside a package of short-term and longer term measures intended to tackle "unscrupulous behaviour" by providers of short-term credit to consumers.

However, it has ruled out the immediate introduction of a cap on the amount of credit that can be extended to a borrower through a payday loan. The FCA will instead be given the power to introduce a cap if appropriate to do so, once it takes over responsibility for the consumer credit sector, the Government said.

Financial services expert Ian Roberts of Pinsent Masons, the law firm behind Out-Law.com, described the Government's approach as "sensible".

"The demand for short-term credit will not disappear simply by turning off the supply, and consumers will be forced to find credit through unregulated, illegitimate means," he said. "It is better that borrowers who would otherwise be unable to borrow funds from legitimate sources are able to do so from businesses that are properly regulated, even if interest rates are high."

Separately, the Office of Fair Trading (OFT) warned lenders that they now have twelve weeks to "change their business practices or risk losing their licences" as the outgoing regulator concluded its review of the sector. The OFT said that it had uncovered evidence of "widespread irresponsible lending" and failure to comply with existing standards. It has also begun a consultation on whether to refer the sector to the Competition Commission after it found evidence of "deep-rooted problems in how lenders compete" with each other.

Consumer Minister Jo Swinson described the problems identified by the OFT as "deeply concerning". The Government has proposed the introduction of a new code of practice for the £2 billion sector, as well as potential restrictions on how lenders are able to advertise to consumers.

"The Government is committed to tough action to tackle these problems," Swinson said. "The OFT's enforcement action will stop payday lenders taking advantage of those in financial difficulty. In April 2014, we are giving responsibility to regulate this industry to the FCA, who will have more rigorous powers to weed out rogue lenders."

"The Government also wants to see tough action to clamp down on the advertising of payday lending, and will start immediate work on this. The Government will work closely with the OFT, Advertising Standards Agency, Committees of Advertising Practice and industry to make sure advertising does not lure consumers into taking out payday loans that are not right for them," she said.

Companies providing consumer credit, including payday lenders, are currently regulated by the OFT under its Irresponsible Lending Guidance (80-page / 785KB PDF). The OFT began an "extensive" review of compliance with the guidance by payday lenders last February, following an initial review of the websites of a number of companies operating in the sector.

Payday lenders are companies that offer high interest, unsecured loans intended to be repaid when borrowers receive their next regular income payment. The market was worth between £2 and £2.2bn, or between 7.4 and 8.2 million new loans, in 2011/12 according to OFT estimates; up from an estimated £900m in 2008/09.

The OFT inspected the 50 largest companies operating in the sector, which it said accounted for 90% of all loans. It found issues in lenders' assessment processes, both before lending and before 'rolling over' an existing loan into the following month; and evidence of aggressive debt collection practices and problems with the way lenders treated borrowers in financial difficulty.

Lenders tended to emphasise speed and ease of access rather than the cost of loans and relied too heavily on rolling over loans as a source of revenue. Almost one third of the loans taken out in 2011/12 had been rolled over at least once, according to the OFT's report, with the extra interest charged accounting for almost half of lenders' revenue. Nearly 20% of revenue came from the 5% of loans rolled over four times or more, the OFT said.

"The OFT's findings in this final report are not particularly surprising, and confirm what was already apparent from their earlier work in the sector," financial services expert Ian Roberts said. "The findings show that the regulator is becoming more proactive in tackling rogue lenders, and it is consulting on a potential referral to the Competition Commission to find out what else can be done."

"Providing that the problems identified by the OFT in its compliance review are addressed, licensed payday and other short-term lenders will continue to play a vital role in the consumer credit market. Responsible payday and other short term lenders that comply with the OFT's requirements will be delighted by the various measures announced by the OFT and the Government, which will go some way to ensuring a level playing field for businesses operating in this sector," he said.

The FCA will take on the conduct and compliance functions of existing financial services regulator the Financial Services Authority (FSA) when the latter is dissolved next month. According to a consultation document on its additional consumer credit powers, published by the FSA, it will begin to grant interim permissions to consumer credit providers from 1 April 2014. Transitional arrangements will end in 2016, by which time firms will have to be fully authorised.

Under the new regime, the FCA will have more power to make rules and ban harmful products than the OFT currently has. It will be able to apply its full enforcement powers to consumer credit firms, including banning firms and individuals and imposing fines, and it will also have the power to require firms to reimburse consumers who have lost out due to the actions of a lender. Businesses that offer credit as a "side activity", such as clubs that allow members to pay by instalments, will be subject to less onerous standards and will pay lower fees, the FSA said.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.