Following intensive discussions with the Government, the four Trade Associations representing over 90 per cent of the payday and short-term loan industry, have agreed to add to their Codes of Practice by 25 July 2012 to deliver better consumer protections.
The agreement comes as the Government responds to the BIS Select Committee's Report into Debt Management and sets out further actions on payday loans, consumer credit regulation and debt management.
The commitments made by the industry on payday loans include:
- a good practice customer charter explaining how the loan works and the costs involved;
- a commitment to inform customers three days before money is withdrawn;
- increased transparency about loan repayment so that consumers can make informed decisions and are not surprised by hidden payments;
- more help for customers in financial difficulty by freezing charges and interest;
- robust credit and affordability assessments to ensure loans are suitable for the customer's situation; and
- effective compliance monitoring by the Trade Associations to root out poor practice in the industry.
Business Minister Norman Lamb said:
"Today's agreement by the payday lending industry is a step in the right direction and I welcome the commitment of the four Trade Associations to strengthen their codes of practice. The Government sees it as vital for the industry to deliver real enhanced consumer protections and to provide more clarity through a good practice customer charter.
"However I want to see further action- in particular, on the use of continuous payment authority. I expect the industry to respond effectively to any recommendations which emerge out of OFT's investigations. I also want to make sure that the industry can self-regulate effectively to drive out rogue companies.
"Payday loans should only ever be used as a short-term financial stop-gap, not as a long-term solution to financial difficulties. I would urge people to think carefully before taking out a short term loan and to consider affordable alternatives such as their local Credit Union."
The Department anticipates that the outcome of the OFT's compliance report will also require the industry to deliver further measures to address consumer detriment identified in this market. The Government is also considering giving the OFT new powers to suspend credit licences with immediate effect and will provide an update on this shortly.
In line with the principles of freedom, fairness and responsibility, the Government's response maintains the vision to empower consumers so that they have the right tools to make informed decisions for themselves and that they should be free to borrow if that is what they decide is in their best interests.
At the same time, there should be a safe and fair regulatory framework for credit and personal insolvency that protects vulnerable consumers, particularly those at risk of falling into financial difficulty, and which drives rogue companies out of the market.
The other commitments outlined in the Government's response include a more detailed timetable and methodology on the transfer of consumer credit regulation from the OFT to the new Financial Conduct Authority.
On debt management, Norman Lamb will chair the initial industry-wide meeting on 14 June to discuss the feasibility of a Debt Management Plan Protocol. This aims to improve industry standards by ensuring that plans are sustainable and in the best interests of all parties, especially enabling consumers to compare providers.
The University of Bristol Personal Finance Research Centre has also provided an update, published today, on their ongoing research into the impact of a variable cap on the total cost of high cost credit, including the payday loans market. This was commissioned by the Government and will report back at the end of the summer.
The research team have completed a review of previous evidence against their research objectives as well as carrying out in-depth telephone interviews with five different high cost lender trade associations, 24 lenders and a consumer survey of 1,500 customers of payday loans, home credit and pawnbrokers.
The Government will continue to take a strong interest in this market and work with the regulators, consumer groups and industry representatives to ensure consumers are able to exercise choice and are properly protected.
Joanna Elson, chief executive of the Money Advice Trust, said:
"It is right that payday lenders subject their own practices to much greater scrutiny than has been the case. However, the new measures announced today fall short of providing suitable protection for the many people affected by the bad practices of payday loans companies.
"These organisations are licensed by the OFT and therefore must comply with the OFT Irresponsible Lending Guidance, something which we have found they repeatedly fail to do. It is difficult to see how changes to four separate voluntary codes of practice are going to be more effective than the existing OFT guidelines.
"The specific points that payday lenders will sign up to under these improved voluntary codes of practice do not clearly go beyond existing requirements made by the OFT.
"We are pleased to hear the Government recognise that this only one step in the right direction, and especially that more action must be taken to stop the abuse of Continuous Payment Authority. It is clear that far more must be done to stem the tide of payday loan problems faced by more and more people across the UK every day. In the first three months of this year National Debtline received 4,725 calls for help with payday loans, 58 per cent more than the previous quarter and 133 per
