Hot from its accession to the regulatory job in April, the Financial Conduct Authority has been keen to get stuck into on a lending sector that’s been raising eyebrows particularly in government circles. In September, the FCA is finally due to open a consultation exercise on payday lenders.
And by next April, when its remit extends to include payday lenders, it is likely to have banned most or indeed all advertising.
Not before time, some would say. Although payday loans can fulfil a useful function in certain situations, especially for consumers with only limited savings – and although their cost to the borrower is modest enough if they’re repaid on time – the growing evidence is that around half of all payday loans are not repaid on schedule. Instead, they are rolled forward in a manner which brings the enormously high APR interest rates (as high as 4,200%) into play.
The Public Accounts Committee estimated last autumn that around 2 million people were currently using payday loans, and independent estimates now suggest that around 5 million new loans will be taken out this year. The majority of these borrowers will be from low-income households.
The Office of Fair Trading concedes that the worst stereotypes are misguided. The typical borrower, it says, is “more likely to be a young male, earning more than £1,000 monthly, and in rented accommodation.” And that many are unmarried with no children.
But the OFT declared in March that a survey covering 90% of lenders had found widespread abuse and other shortcoming. Lenders weren’t doing enough to ascertain the affordability of each loan, it said, and there were “aggressive” debt collection practices combine with a lack of sufficient tolerance for those forced into default.
The FCA is considering measures such as limiting the number of loans that any individual can take out, and the number that can be rolled over. It wants a defined time lag between loan approval and payment, and a cap on the total cost of credit.
And finally, as FCA boss Martin Wheatley rather tellingly put it: “If companies are targeting people with jobs, then why advertise on daytime TV?”