Government Acts on Pay Day lending

In March 2013, BIS-commissioned research from Bristol University into the impact of introducing a cap on the total cost of high cost credit, including payday loans, was published. The Office of Fair Trading (OFT) also issued the findings of their review of payday lenders' compliance with the law and with OFT guidance.

• Taken together, these reports found that the payday lending market was not functioning in consumers' interests and that there was widespread non-compliance and poor practice in the industry. Whilst the Bristol Report also raised some concerns about the other forms of high cost credit it looked at, the evidence did not suggest that the scale of the problem was as pronounced as in the payday lending market.
• As a result, the Government announced a strong action plan to tackle the current problems in the payday lending market working with the relevant regulators. Since then action has been underway to deliver on these announcements.
• The current regulator OFT is in the midst of tough enforcement and compliance activity. Since March, OFT have sent compliance letters to each of the 50 leading payday lenders they reviewed (which together account for 90% of the market). Of the 21 that have responded so far, six have left the payday market - two surrendered their licences upon receiving letters and four have ceased to provide payday loans. The remaining lenders have 12 weeks from receipt of their letters to prove their compliance. If the OFT still have concerns upon receipt of the responses from lenders, they will consider taking further enforcement action. This can include taking steps to remove the lenders' licence, impose legal requirements on them to change their behaviour or, if the OFT have evidence of imminent harm to consumers, suspend their licence immediately. In addition to these 50 lenders, the OFT has revoked the licences of three other payday lenders and another has surrendered its licence since March.
• OFT have also just referred the entire payday lending market to the Competition Commission, on the grounds that there are fundamental problems with the way the payday market works. The Competition Commission has far reaching powers that could fix these problems if they decide to and the Financial Conduct Authority (FCA) will work closely with them. The FCA is the successor body to the Financial Services Authority and will take on responsibility for regulating consumer credit from April 2014.
• The FCA has committed to prioritise action on payday lending right from April 2014. This includes looking at turning OFT guidance on payday lending into FCA rules which will be subject to more stringent enforcement and compliance action from April 2014. The FCA are also considering whether new, additional rules on payday lending are necessary from April 2014. BIS have commissioned research on payday lending advertising to help develop Government's understanding of the impact it has on consumer behaviour and to help inform FCA's thinking as they look towards regulation of this sector. The FCA will be setting out their thinking on new rules in September in a consultation.
• Government has just held, on 1^st July, a payday lending summit to take stock of where we have got to since March, and to consider what still needs to be done collectively to address outstanding concerns. This included consideration of what measures the FCA could introduce to reduce consumer harm in the industry when they become the regulator in 2014. At the summit, we also launched two new surveys - a consumer survey and a business survey to check how well the payday industry is meeting the standards set out in the voluntary codes implemented by industry last November.
• Government is also supporting the provision of alternatives to payday loans. We have committed investment of up to £38 million in credit unions - to increase access to affordable credit for at least 1 million more people and save consumers up to £1 billion in loan repayments by March 2013. We are also raising the maximum interest rate credit unions can charge per calendar month from 2% to 3%, coming into force on 1 April 2014. This should reduce losses on loans, increase stability and improve consumer access to affordable credit. Further, in January 2012, the Government brought a Legislative Reform Order into effect, to improve the environment in which credit unions operate. In addition, we have worked with the FCA to transfer the regulation of Northern Ireland credit unions to the FCA from 31 March 2012. This means Northern Ireland credit union depositors will be protected by the Financial Services Compensation Scheme for the first time.