Payday loans: what action is being taken?

The issue of short-term, high interest loans is raised in a report from MPs on the business, innovation and skills select committee.

With the economy in the doldrums, the committee says action is needed to stamp out the abuse of customers who are “over-indebted, vulnerable and desperate for help” – and risk losing their homes if they cannot afford to repay their loans.

Consumer Affairs Minister Norman Lamb told Channel 4 News the government was carrying out a review, which was due to report in the summer, but he warned companies “breaching standards of acceptable behaviour” that they could lose their licences.

The MPs want the government to limit the rolling over of payday loans, in which interest keeps piling up.

They are also calling for lenders to record all transactions on a database after hearing that some people have more than 20 loans.

In addition, the committee argues that a fast-track procedure should be put in place to suspend lenders’ credit licences, with regulators given extra powers to ban products which are “harmful” to customers.

The report also recommends that the standard annual percentage rate (APR) measurement should no longer be used for short-term loans. Instead, it says the total cost of the loan, including interest and fees, should be made clearer.

The government

The government is currently talking to the payday loans industry about whether its code of conduct needs tightening, with restrictions on the rolling over of debt.

It has announced that firms will face tougher scrutiny when the new financial regulator, the Financial Conduct Authority, takes control of overseeing the consumer credit market.

The payday loan industry has had the chance to put its own house in order, but has failed to stamp down on irresponsible lending. Sarah Brooks, Consumer Focus

They will be forced to undergo more rigorous checks than at present and risk an unlimited fine if they break the rules.

The government has also asked academics at Bristol University to look at whether a cap on what a lender can charge would work. On this question, there is surprising unanimity between the industry and the customer watchdog Consumer Focus.

Norman Lamb told Channel 4 News: “We want to do the research. I believe in evidence-based policy-making and I think we’ve got to see what the impact of a cap would be in this market. It’s also really important that individual consumers can get access to credit, whoever they are, when they need it, and be able to make their own judgments.”

The law

The regulations say APR should be used in adverts, but borrowers must also be told how much they will be paying back in total.

There is no cap on the fees lenders can charge, but courts can take action if they reach the conclusion that a borrowing agreement is unfair.

The industry

The Consumer Finance Association (CFA), which represents 70 per cent of the payday industry, says people taking out loans typically borrow up to £800 for a month or two, paying £10-30 per month for every £100 borrowed.

The CFA says it has been working with the government on an enhanced code of conduct that will be launched in April. This will include limits on roll-overs, transparency in advertising and assistance for consumers in financial difficulty.

The CFA rejects the idea of a database on the basis that it would be expensive to maintain and could push up the cost of loans and limit their availability.

It agrees with the business committee that borrowers should not be presented with a “meaningless and unhelpful” APR, but should instead be told exactly what they will be paying back.

The CFA says clearly in capital letters on its website: “Payday loans are designed for those who have bank accounts, a job and disposable income. They are not loans for people on benefits or very low incomes.”

One company with a high profile at the moment is Wonga.com, whose adverts have appeared on radio and television.

In an interview with the Guardian on 1 March, the firm conceded that it occasionally lent money to benefit recipients. But this does not bring it into conflict with the CFA – because it is not a member.

Instead, Wonga is represented by the Finance and Leasing Association (FLA), which does not prohibit loans to people on benefits.

In February, the FLA updated its code of conduct, with people prevented from extending their short-term loan on more than three occasions.