* Chris Finney Commentary: UK: FCA: The Regulation of Payday Lenders
Payday lenders lend relatively small amounts of money to consumers for relatively short periods of time.
When the Office of Fair Trading (OFT) published the results of its High Cost Credit Review on 15 June 2010, it reported that the high cost credit market (which includes payday loans) "work[s] reasonably well"; it "serve[s] borrowers not catered for by mainstream suppliers, complaint levels are low, and there is evidence that for some products, lenders do not levy charges on customers who miss payments or make payments late". It also said that the problems that do exist in the market arise mainly because of "weaknesses in the financial capability of consumers", the limited number of payday lenders, and consumers' inability to drive competition between them. The OFT specifically considered the case for payday loan price controls, but rejected the idea because it was "concerned that such controls may further reduce supply and [could lead] suppliers to recover income lost through price controls by introducing or increasing charges for late payment and default". (The OFT's report is available here.)
Since then, payday lenders have been at the centre of a media storm. The sector has responded...and so has the government.
The Consumer Finance Association - a trade association - launched a Good Practice Customer Charter on 25 July 2012, which was intended to enhance the protection available to consumers who borrow from payday lenders. On 26 November 2012, that Charter was enhanced by an Addendum to Industry Codes of Practice; and the CFA implemented a Lending Code for Small Cash Advances, which is intended to ensure that CFA members comply with the CFA's minimum practice standards. (The Charter, its addendum, and the CFA's Code are available here, here and here.) These documents were prepared and published with the encouragement of, and to meet deadlines agreed with, the government and they include many of the things the government said it wanted ((for example) limits on the number of times a payday loan can be rolled-over, and a breathing space for customers who are struggling to repay their debts).
Strange then that Lord Sassoon, a Treasury Minister, should announce in the House of Lords (on 28 November and 5 December 2012) that "we need to ensure that the FCA grasps the nettle when it comes to payday lending"; before moving an amendment to the Financial Services Bill which (thankfully) falls short of the government's rhetoric on these issues. If it becomes law, Lord Sassoon's amendment will insert a new section 137BA into the Financial Services and Markets Act 2000 (see Hansard, column 674 et al, which is available here). The new section would allow (but not require) the FCA to:
- Make rules that prohibit payday and other lenders from:
o Levying particular kinds of charges, and charges in excess of a specified
o Entering into credit agreements that are capable of remaining in force
after a specified period;
o Exercising some of their rights under a regulated credit agreement; and
- Require lenders that impose excessive charges to waive the consumer's outstanding debt, before returning his loan repayments, and paying him compensation.
A market intervention of this type seems incredible. It creates significant unintended consequence risk, does little or nothing to address the problems identified by the OFT - and may well exacerbate them.
The government is apparently expecting the FCA to consult on the use of these powers in the first of half of next year. I'll blog again when the FCA publishes in consultation.
Edwards Wildman Palmer UK LLP
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