Though the regulator believes payday lending “has a place”, it said it would enforce providers to conduct tighter affordability checks among a raft of proposals for the sector.
The FCA takes over responsibility for the regulation of consumer credit from the OFT on 1 April 2014.
There are currently more than 50,000 firms with existing credit licences.
The regulator said it wants to ensure that consumers are given enough information to make informed choices, that the market is competitive and offers loans that meet customer needs, and that those in difficulty are treated fairly.
The key elements of the proposed consumer credit regime are:
• Affordability checks for every credit agreement to ensure that only consumers that can afford a loan can get a loan.
• All advertisements and other promotions must be clear, fair and not misleading. The FCA will be able to ban misleading adverts.
• Firms that do higher risk business and pose a greater risk to consumers will face a tougher supervisory approach. Specific rules for the payday sector have been proposed and include: (1) Limiting loan rollovers to two; (2) Limiting the number of attempts by a payday lender to use CPAs to pay off a loan, to two; (3) Information on where to get free debt advice will be given to every borrower that rolls over a loan; and (4) Clear risk warnings to be displayed on all adverts and promotions along with more information about debt advice.
The consultation is open until 3 December 2013 and the FCA will publish its final rules and guidance in February 2014.
Of payday lenders, FCA chief executive Martin Wheatley said: “We believe that payday lending has a place; many people make use of these loans and pay off their debt without a hitch, so we don’t want to stop that happening.
“But this type of credit must only be offered to those that can afford it and payday lenders must not be allowed to drain money from a borrower’s account. That is why we’re imposing tighter affordability checks, and limiting the use of rollovers and continuous payment authorities.
“Today I’m putting payday lenders on notice: tougher regulation is coming and I expect them all to make changes so that consumers get a fair outcome. The clock is ticking.”
Andre Spicer, professor of organisational behaviour at Cass Business School, said: “The regulations announced by the FCA on payday lenders only get to first base. The regulations do not address the usurious rates of interest charged. Nor do they ask whether the industry should exist at all. This is surprising because Australia and other European countries have put a cap on interest rates.
“Most states in US have effectively banned payday lenders. The industry claims such measures will push borrowers into the illegal market. But this claim is far from certain for the mass of borrowers who would never consider going to a loan shark. A ban would probably push the majority of lenders to explore more ethical alternatives like community credit co-ops.”
