Payday lenders face tighter regulations
The government’s Financial Services Bill, which was presented to Parliament today, could see Payday loan companies facing much tighter regulation.
Payday loans are designed to provide emergency funds for a short period of time.
Amounts of between £50 and £1,000 are offered on weekly or monthly terms for a charge of around £30 for every £100 borrowed.
If the loan is paid back at the end of the term there isn’t a problem, but they are extremely expensive if the loan is rolled over for another month, as the cost equates to interest rates as high as 2,000% APR.
Consumer groups have been calling for payday lenders to be more heavily regulated for some time, over concern that many people end up in a spiral of debt after using their services.
Housing charity Shelter recently warned that one in seven Britons have used payday loans or unauthorised overdrafts in order to pay their rent or mortgage in the last year.
Payday lenders are expected to come under the scrutiny of a new watchdog, the Financial Conduct Authority (FCA), which will have to power to impose unlimited fines on lenders that break the rules.
When the FCA starts operating in 2013 lenders have to undergo more rigorous checks before they can commence trading and will have to present a business plan and explain how they will treat customers.
The FCA will have stronger powers than current watchdog, the Financial Services Authority, to investigate firms believed to be flouting regulations and will be able to ban specific products that harm consumers’ interests.
The Financial Services Bill will also see the launch of the Financial Policy Committee and the Prudential Regulation Authority, which will take on some of the outgoing Financial Services Authority’s role.
Together the three new agencies will be expected to develop a regulatory culture of judgment, expertise and proactive supervision, rather than ‘tick-box compliance’.