We've written to the worst offenders to challenge the level of their default fees, which we believe should be no higher than the administrative costs associated with defaulting.
High charges are one of the biggest factors that tip borrowers into a spiral of debt - so we believe it's time for action. You can help by signing our petition.
Exploiting borrowers with excessive fees
Richard Lloyd, executive director at Which?, said:
'If they cannot justify why these charges are so high and refuse to cut them, we would look to take further steps to protect vulnerable consumers. The regulator must also take action to ensure all fees are fair, proportionate and only reflect lenders' costs.'
Fair, proportionate and reflective
Previous Which? research has found that more than half of payday loan users (56%) had incurred charges for missed or bounced credit repayments over 12 months, compared to 16% for all credit users. One in five payday users (20%) said they had been hit with 'unexpected charges'.
The Financial Conduct Authority's consultation on credit closes today. We're submitting our research and your thoughts on how we need to clean up the credit industry as part of its review.
Your input should help widen the scope of the regulator's review of the credit market, such as the issues you’ve highlighted over unfair overdraft fees. Ashlee told us:
'I went over my arranged overdraft agreement by £6 and they charged me £45!'
The FCA to take action on credit
And Lucy felt that credit lenders are: 'Always out to catch you with terms that are rarely transparent.'
The FCA's chief executive Martin Wheatley explained how the regulator is approaching its review of the credit market in a guest post for our website. He said:
'We know that we have to strike the right balance. The FCA obviously must allow businesses to operate and make sure we keep a competitive market. However, I believe that there must be a fundamental principle for every firm offering credit – the well-being of consumers should be at the heart of the business.'
The FCA officially takes on regulation of the credit market in April 2014. We'll be reporting back as soon as we’ve news on its action plan to clean up credit.
Ed Miliband today announced that Labour would impose a levy on payday lenders if the party came into power.
Labour's aim is to raise millions of pounds through a levy on payday lenders’ profits, which it says would be used to fund low-cost alternatives like credit unions.
In response to Labour’s announcement, our executive director Richard Lloyd said:
‘Millions of people are increasingly reliant on high cost credit to pay for essentials or to repay other loans, pushing them into a vicious cycle of debt. We urgently need to see more alternatives to payday loans that give people affordable access to credit without the irresponsible practices endemic in the payday sector.’
We want to make sure that borrowers are treated fairly whatever form of credit they use. This is why we’re calling on the Financial Conduct Authority to clamp down on irresponsible lending as part of our Clean Up Credit campaign. And we need your help.
Use the form to the right to tell us about your experiences of turning to high cost credit like payday loans and overdrafts – we need as many stories as possible to make the biggest impact.
Paul Blomfield MP has teamed up with Which?, Citizens Advice, Step Change Debt Charity, Church Action on Poverty, and the Centre for Responsible Credit to take action on the credit industry. He is calling for tougher regulation to tackle spiralling levels of debt. The Charter sets out a number of recommendations to ensure the payday loan sector is treating borrowers fairly.
Which? is calling on the Financial Conduct Authority to clean up the credit industry as a whole and is fully supporting the cross-party Charter. You can take action by signing Paul Blomfield's petition and sharing your experiences with us.
Our research found that other forms of credit, such as overdrafts, can be as expensive as payday loans.
The payday loans market has attracted criticism for some of the worst practices in the credit market, but our research has found that in some cases using an authorised or unauthorised overdraft with your bank can be just as expensive.
Borrowing £100 for 31 days will cost £30 with a Halifax authorised overdraft or £20 with some Santander accounts, and borrowing the same amount for the same time with a payday loan company costs between £20 and £37.
With the Halifax Reward current account and the Santander Everyday Account it can cost £100 in charges for going £100 into an unauthorised overdraft for a month.
Richard Lloyd, Which? executive director said: 'The government and regulators must not lose sight of the urgent need to clean up the whole of the credit market. High street bank overdraft fees can be just as eye-watering as payday loans.'
Consumers need the credit market to work competitively. We want the Financial Conduct Authority to clamp down on excessive charges and irresponsible lending, and to make sure borrowers are being treated fairly whatever form of credit they're using.
The Financial Conduct Authority (FCA) has set out how it will regulate consumer credit to tackle the payday loans industry.
The FCA wants to ensure that consumers are given enough information to make informed choices, that the market is competitive and offers loans that meet customer needs, and that those in difficulty are treated fairly.
Highlight the potential risks
It is proposing to limit the number of times a firm can rollover a loan to two and limit the number of times a payday lender can seek payment using a continuous payment authority to two.
The FCA states that all payday loan financial promotions must come with a clear warning highlighting potential risks. Debt firms holding more than £1m in the last year will have to hold a contingency sum to ensure consumer protection if the firm fails.
Tackle unscrupulous payday lenders
Richard Lloyd, Which? executive director, said it's good to see the FCA planning to take tough action to clean up credit.
He added: 'We welcome proposals to tackle unscrupulous payday lenders but we want the regulator to go further and use its full powers to clamp down on problems faced by struggling consumers across the credit market, like sky-high penalty charges.'
We're collecting evidence from consumers about their experiences of the credit industry. The evidence collected will be shared with the Financial Conduct Authority to encourage it to set tough rules for lenders.
In a guest post for our community site Consumer Affairs Minister Jo Swinson explains how the government is working to clean up the payday loans industry. She asks: 'Are there alternatives to payday lenders when people are short of funds?'
'We're all aware that times are tough, and people are having to tighten their purse strings. I understand how people can feel when they’re struggling with money problems, but one of the worrying trends to come out of this period has been the rise in payday lending. According to a Which? survey, around one million households take out payday loans each month.
The harsh reality is that many people are taking out payday loans when they are not right for them, which is why the government and regulators are taking tough action to clean up the industry. I do think we have to delve into the root causes of these problems, which is why we want to hear your opinions on payday lending.'
Payday lenders faced government scrutiny today. Serious concerns were raised about payday lending and what the industry should do to protect their customers.
From April 2014 the Financial Conduct Authority (FCA) will have much stronger powers in regulating payday lenders. But payday lenders were urged to start acting responsibly before the FCA's rules came into play.
Which? executive director Richard Lloyd said: 'It's clear the industry must not wait for new rules to come in and must clean up its act without delay. More action is also needed by the whole of the credit industry and government to come up with new ways of providing affordable credit to people that need it and can afford it.'
We will be watching closely to make sure the promises we heard today from ministers and regulators are kept, and quickly.
The Office of Fair Trading (OFT) confirms that it has referred the £2bn payday loan sector to the Competition Commission.
The failures in this sector are endemic: from dodgy advertising to unfair default charges, from a lack of proper affordability assessments and inappropriate loan rollovers to a lack of competition on price. Payday lenders have effectively been left to their own devices, resulting in significant harm for many hard-pressed borrowers.
That the OFT now has the bit between its teeth and is taking action is a welcome move. The regulator’s hard-hitting report published this morning lays bare the many faults of the high-cost credit market and we support its decision to get the Competition Commission involved.
The OFT has taken a big positive step today in referring the sector to the Competition Commission. While this review takes place, the OFT must continue to take early enforcement action against any company found to be lending irresponsibly.
The government has today announced plans to impose tougher restrictions on payday lenders, following a year-long investigation by the Office of Fair Trading (OFT).
Consumer Affairs minister Jo Swinson and Economic Secretary Sajid Javid spoke about the government's proposals to tackle payday lenders during a visit to meet staff from the Which? Money Helpline Service (see photo below).
The ministers acknowledged that the consumer credit market, including the payday loan sector, is letting consumers down. The government said that tough action is required to prevent payday lenders from taking advantage of vulnerable people. It confirmed that the new regulator will be given 'unprecedented new powers' to intervene in cases of irresponsible lending, including the ability to ban products and impose unlimited fines.