Payday loans: what are the tough new rules for lenders?
Firms such as Wonga will have to carry out affordability checks or face unlimited fines
TOUGHER rules for payday loan companies are to be unveiled today by the Financial Conduct Authority (FCA) in a bid to protect consumers from spiralling debt.
The FCA, which takes over the regulation of consumer credit on 1 April next year, plans to ban some types of loan and force lenders to place "risk warnings" on adverts.
The industry, which includes firms such as Wonga, Quick Quid and Money Shop, has come under fire for irresponsible lending and is currently being investigated by the Competition Commission, reports the Daily Telegraph.
The sector is lucrative and worth around £2bn a year. Wonga, whose interest rates can reach 5,853 per cent, is thought to be Britain's largest payday lender. Last year it handed out nearly 4 million loans, worth a total of £1.2bn, to 1 million customers in Britain.
Here are the changes being introduced by the FCA:
- Payday lenders will face tighter restrictions on what they can say in adverts and could be forced to include "risk warnings" advising borrowers about the dangers of debt.
- The FCA would be able to ban any loans or adverts if they do not meet its standards. It has promised to pull the plug on any misleading adverts.
- Companies could face unlimited fines for breaking the rules.
- Payday lenders will have to carry out compulsory affordability checks on borrowers to ensure that they are able to repay their loan.
- Restrictions will be introduced for 'roll-overs', where lenders offer more time for borrowers to pay off their loan, but with added interest charges. This is one of the most profitable methods for loan companies, and the main reason why many borrowers find themselves with large debts they cannot afford to pay off.
- The number of times payday firms can unexpectedly drain money from people's bank accounts, known as a continuous payment authority (CPA), will also be restricted.