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Payday lenders face tighter regulations

03/10/2013

City regulator, the Financial Conduct Authority (FCA), has announced plans to tighten regulations around the payday loan industry.

The FCA said it would be looking into a series of initiatives, including warnings about the danger of debt on adverts, limiting the amount of times the lender can action a continuous payment authority (CPA), limiting the number of loan rollovers, and forcing lenders to conduct a comprehensive affordability check on consumers before a loan is approved.

It is hoped that tighter regulations will help to bring to an end irresponsible lending to those who don’t have the means to pay the money back.


So, what is set to change?


The first thing consumers will notice is the risk warnings placed on adverts. Many companies who offer certain financial products under regulation from the FCA have to place risk warnings on adverts for the products by law. Currently, this is not the case for payday lenders, but the FCA is keen to make sure that consumers understand the dangers of using payday lenders.


On top of this, the FCA has said that all adverts must be “clear, fair and not misleading”, and reserve the right to ban any adverts that do not meet their standards.


Another change is the fact that borrowers will be refused a loan until they pass an affordability test. The aim of this is to ensure that only those who can afford to pay back the money borrowed will be approved the credit agreement. Currently, many payday lenders allow money to be borrowed at an agreed rate, but if the borrower can’t afford to pay the money back and defaults on a payment, then the rate can be hugely inflated.


The next change is one that will affect those who have been approved a loan. The FCA will limit the amount of continuous payment authorities (CPA) that lenders are allowed to impose on borrowers, to two. A CPA is an agreement between you, in this case as a borrower, and the lender that allows them to access your account and take money. It is similar to a Direct Debit, but there is no specified amount they have to take, and no specified date that money has to be taken on.


Finally, the FCA will limit the amount of times a lender can rollover a loan, again to two. A rollover occurs when you agree with the lender to extend the repayment period. Usually there will be a charge for doing this, and sometimes the repayment rate is also raised, potentially costing the borrower a significant amount of money.


Martin Wheatley, the FCA’s chief executive, said: “We believe that payday lending has a place; many people make use of these loans to pay off their debt without a hitch, so we don’t want to stop that happening. But this type of credit should only be offered to those who can afford to pay it, and payday lenders must not be allowed to drain money from a borrowers account. That is why we are imposing tighter affordability checks, and limiting the use of rollovers and continuous payment authorities”.


Need advice? Do you need advice on borrowing, or repaying debts? If so, please contact our financial advisors who will help you deal with your issue.

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