Firms offering high-cost short-term credit must now follow additional rules on rollovers, continuous payment authorities and risk warnings.
These rules apply to agreements in place on 1 July 2014 and entered into after this date.
Where a borrower cannot afford to pay back a loan many lenders offer the opportunity to ‘rollover’ or extend the loan.
While a rollover may work well for some borrowers, the FCA are concerned that loans that are repeatedly rolled over can lead to an unsustainable debt burden for many borrowers.
Payday lenders and other firms offering high-cost short-term credit must now limit the extension of loans to two rollovers.
Where a high-cost short-term loan has been rolled over twice, including before 1 July 2014, lenders will not be able to rollover the loan again.
Before rolling over a loan these lenders will also have to give the borrower an information sheet that explains where and how to get free debt advice.
A continuous payment authority, which may also be called a ‘recurring payment’, is where a business has permission to take a series of payments from a customer’s debit or credit card.
Payday lenders and other firms offering high-cost short-term credit often use CPAs to claim repayments.
The FCA found some firms were using CPAs as a debt collection method and that some borrowers therefore had difficulties paying for essentials such as food and heating.
High-cost short-term lenders are now limited to two unsuccessful attempts to use a CPA to take a repayment and cannot use a CPA to take a part-payment.
However, the borrower will be able to ‘reset’ the CPA following two unsuccessful attempts to use a CPA, when the agreement is rolled over or refinanced.
There are similar rules for loans that are to be repaid in instalments and strict conditions around resetting a CPA, to ensure customers remain in control of their finances.
Firms offering high-cost short-term credit must now include a prominent risk warning on all financial promotions.
These lenders had to include a risk warning on all financial promotions in electronic communications since 1 April 2014 (unless the medium used makes this impracticable). The risk warning is now also required on print, TV and radio promotions.
