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Payday loans have their place – but not at any cost

Stopwatch against red background

It’s crunch time for credit. The Government is implementing a cap to the cost of payday loans and the Financial Conduct Authority is due to take over the policing of credit from April 2014. The FCA’s CEO tells us more…

Nearly 70,000 firms have consumer credit licences providing a range of services and products, including credit cards, loans, hiring cars and tools and offering customers the chance to pay by instalment. Credit, for many people, has become an essential part of our daily lives.

Next April, the FCA takes over regulating consumer credit and my aim is to make sure people have the right level of protection, while ensuring the market is competitive.

Tougher fines for rule breakers

In October, we published details of how we propose to regulate this industry and I’m interested to hear your thoughts. We announced affordability checks for every credit agreement to make sure people only take out credit they can afford. We said we want people to have more information when they consider taking on credit. We require all adverts be clear, fair and not misleading – we can ban them if they aren’t.

We also said that the FCA will put firms under more scrutiny. In the future, they will have to prove they have a suitable business model. My teams will monitor the industry and we will step in when there is evidence of poor practice. Any firm that breaks the rules will be clear that they could end up with a tough fine.

You may have seen media reports on how we have put the spotlight on payday loans and I make no apology for that. I have heard from people who had seriously suffered after taking out these loans. Most of us can only imagine the shock to see your bank account cleared of all of your money in just one day.

Watching firms offering credit

The FCA has proposed a restriction so that firms will no longer be able to dip into a customer’s bank account three, four times or more in one day. Another proposal is a restriction on the amount of times loans can be rolled over. Payday loans have their place – but not at any cost.

I am inviting you to respond to our Consultation Paper before the 3 December. Also I’m grateful to Which? for giving me the opportunity to ask you what you think of our plans. Tell me about your experiences – good and bad – I want to hear from you.

We know that we have to strike the right balance. The FCA obviously must allow businesses to operate and make sure we keep a competitive market. However, I believe that there must be a fundamental principle for every firm offering credit – the well-being of consumers should be at the heart of the business.

Which? Conversation provides guest spots to external contributors. This is from Martin Wheatley, chief executive of the Financial Conduct Authority (FCA) – all opinions expressed here are Martin’s own, not necessarily those of Which?.


I do not understand why legislation does not seek to prevent the extortionate charges and interest rates being permitted for any lender. Payday loan companies are, it seems to me, loan sharks who are allowed to advertise.
Why people deal with them is beyond me. What we should be doing is not giving them a cloak of tacit approval, but helping those in need of monetary assistance by setting up sensible means of giving them advice and assistance on how to manage their finances better. This might be a more productive role for government rather than perpetuating legalised extortion.

I was pleased to read the announcement that the government intends to introduce legislation to impose a duty on the FCA, rather than just enable it, to regulate the pay day loans market and to control not just the interest rates but the overall costs of borrowing, including ‘arrangement fees’ and penalties. The usual resistance from the industry – “It’ll drive people into the clutches of illegal lenders”, and so on. . . . Why?

It has been amply demonstrated that many loan companies have been exploiting borrowers. There’s enough margin in the business to enable lenders to make a decent return without exploitation and extortion and to extend credit to people who might not otherwise qualify under more conventional terms. Maybe some applicants will get turned down because they cannot be relied upon to repay a loan; the industry’s preference for whacking people with punitive interest rates in return for an unsustainable loan is not acceptable. At least if all other loans are made illegal as a result of this new legislation, and any duress used in settling unpaid debts made a criminal offence with a heavy penalty, such a loan would become unenforceable. Nevertheless, that does still leave a worrying risk of threatening or menacing behaviour and possible physical violence by or on behalf of illegitimate lenders, and society has to find ways to combat that, to protect people who are vulnerable to such threats, and, as Malcolm says, to put in place support mechanisms to foster responsible financial management.

What ever legislation is used to manage short-term loans it is vital that it does not result in a expansion of the illegal loan-shark business.
Any lender setting up a loan will incur costs and expenses and it is important that these are reasonable and set out separately from the interest element for transparency purposes.
Obviously the shorter the loan period the higher the % cost of the loan e.g. it probably costs the same to set up a 5 day loan as to setup a 5 month one
Using APR as a means of comparing loans of vastly different lengths is generally unhelpful and often used by the media for hyping a story or campaign.