Special feature: FCA rules on payday lending not enough
Today the Financial Conduct Authority will begin to spell out how exactly it plans to regulate the payday lending industry come April 2014.
It will carry over many of the rules from the Consumer Credit Act 1974 – but the interest is in how things will be different after so much criticism of the controversial industry.
At a recent fringe event put on by Respublica at the Liberal Democrat conference Jo Swinson, who is the minister for consumer affairs, said: “We recognise that the Office for Fair Trading doesn’t have significant enough powers, they can’t force lenders to listen and guidance is just guidance.”
This mirrors the desire for the FCA to be a tougher regulatory regime “with teeth”.
But there were signs the FCA is not going to be as tough as it needs to be.
Four months after Lord Parry Mitchell – who will soon introduce a bill in the Lords about the payday lending industry – successfully passed through an amendment to the Financial Services Bill which said the FCA could cap the cost of credit, the government decided this would not be the correct course of action.
Five months later in April 2013 the FCA published an occasional paper which clearly stated “caps on APRs or restrictions on how often [consumers] can borrow might make their financial situation worse”.
While I agree with the FCA that many cosmetic changes need to take place in the payday lending industry such as new rules of advertising, fines for misuse of the Continuous Payment Authority, and better affordability assessments, this alone is not enough.
I believe the FCA should decide on a price cap for the cost of credit. While short term consumer credit is relatively expensive the government and the regulator should work together quickly to set a price cap to stop people – often the most vulnerable people – being ripped off for their borrowing.
A recent report by the London Mutual Credit Union found that short term lenders could break even with loans made with much lower fee costs if they extended their payback terms. If they can do it why can’t payday lenders.