The Financial Conduct Authority (FCA) has announced proposals to ensure better regulation of the payday loans industry and to protect customers.
The FCA has set out its vision for the regulation of consumer credit when it takes over regulation of the payday loans industry from the Office of Fair Trading (OFT) on April 1st 2014.
The FCA's chief executive, Martin Wheatley warned payday loan firms that the "clock is ticking" on firms that continue to conduct themselves in a way that mistreats customers.
Payday loan companies will have to make more stringent affordability checks, so that oly people who can afford to repay a loan are granted one.
New rules that are set to be introduced include banning loans from being rolled over more than twice and restricting the use of a continuous payment authority (CPA) to just two times.
Earlier this year, following an OFT investigation that focused on 50 payday lenders to see if they were acting properly, 19 lenders withdrew from the market. However, the FCA said despite this, loan firms were still not responding as the FCA would like.
The Competition Commission is conducting an investigation into the sector that will be published next year.
The FCA said it is considering whether advertisements for payday loans should carry “risk warnings” to warn potential borrowers about the dangers of spiralling debt.
These would be similar to those used by mortgage lenders that tell homeowners that there home can be repossessed if they fall behind on mortgage payments.
It will also be able to ban advertisements and loans that it does not approve of.
The FCA says the new regime will provide “stronger protection and better outcomes” for consumers.
It will also consider whether to impose a cap on the level of interest that a payday lender can charge.
Martin Wheatley, the FCA's chief executive, said: "Our aim is to create a regime that protects consumers and allows businesses to operate. There is a balance to be struck here, and to make sure we get it right we want to hear from as many interested parties as possible.”
Lenders will be required to make a mandatory affordability on all borrowers and there will be tighter restrictions on what lenders can say in adverts.
Mr Wheatley added: “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.”
Russell Hamblin-Boone, chief executive of the Consumer Finance Association (CFA), which represents many short-term lenders, said: "The CFA and its members have always supported well-designed, well-implemented regulation in order to protect consumers and drive up standards.
The FCA's chief executive Martin Wheatley said: "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.”
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