New payday lender rules take effect

Payday lenders come under a stronger clampdown from tomorrow that will ban them from rolling over loans more than twice and restrict their ability to drain money from borrowers' bank accounts.

Payday lender Wonga sent fake legal letters to customers in a bid to pressure them into paying up
Payday lender Wonga sent fake legal letters to customers in a bid to pressure them into paying up

From July 1, firms operating in the industry will also have to place "risk warnings" on television adverts, which will highlight the problems that late repayments can cause and direct consumers to the Government-backed Money Advice Service (MAS) for help.

The £2.8 billion sector has come under intense scrutiny amid outrage over the way that some consumers have been treated.

Many of the problems found by regulators have revolved around people taking on payday debt they cannot afford, meaning the loan is then rolled over and the original cost balloons. Charity StepChange received nearly 14,000 cries for help last year from people who were struggling with five payday loans or more.

The industry is currently undergoing a full-blown competition investigation, the full results of which will be published later this year.

The Competition and Markets Authority (CMA) suggested in its provisional findings that an independent price comparison website should be set up to help people compare overall payday loan costs more easily, after finding that customers are typically paying £60 a year over the odds for such loans.

Meanwhile, City regulator the Financial Conduct Authority will consult this summer on capping the overall cost of a payday loan.

Since the FCA took over supervision of the market in April, payday firms have to provide financial health warnings in some communications - including emails, online and in texts - and signpost people to free debt help. Consumers are told: ''Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk.''

From tomorrow, they will also have to include these warnings on TV adverts as well as being prevented from rolling a loan over more than twice. Inspectors for the Office of Fair Trading (OFT), which previously regulated the payday industry, said in some of the most severe cases it saw, consumers had rolled over a loan around a dozen times.

Also from tomorrow, payday firms will only be allowed to make two unsuccessful attempts to claw money back out of a borrowers' account using a type of recurring payment known as a continuous payment authority (CPA).

A furore erupted last week when it emerged that the UK's biggest payday lender, Wonga, had sent fake legal letters to customers in order to pressure them into paying up. Wonga has apologised "unreservedly" for the failings, which happened between between October 2008 and November 2010.

Wonga is paying a total of £2.6 million in compensation after sending the correspondence to around 45,000 people and c onsumer campaigners have said the case marked a "shocking new low" for the payday industry.

The FCA has also been working with the industry to encourage ''real time'' data-sharing between lenders before a loan is granted, to give firms the most up-to-date picture possible on whether or not a borrower can afford to take on their debt. This should make it easier to flag up potential problems, for example if someone has tried to take out multiple loans in a short period.

Last week, a real time service called Moda run by credit reference agency Callcredit went live. Those who have signed up include Wonga, QuickQuid and Pounds to Pocket.

Russell Hamblin-Boone, chief executive of the Consumer Finance Association (CFA), which represents short-term lenders said: " Through the voluntary rules that we put in place in 2012, the CFA's members have been working towards the FCA's rules for many months and are fully committed to meeting them.

"The industry has already changed significantly for the better and short-term lenders are now leading the way through initiatives such as real-time credit checks.

"However, over regulation is a real risk. Lenders are facing the prospect of a Government price control before the full impact of new regulations is known.

"Borrowers consistently tell us how much they like and value short-term credit but if the regulator turns the screw too far and drives reputable lenders out of the market, these borrowers will be forced to look for credit elsewhere and this creates a perfect market for illegal lenders."