A new code of practice for payday lenders has been agreed by the financial sectorto provide greater protection to vulnerable consumers, but consumer champion Which? believes it does not go far enough.
Payday lenders must now ensure that information about fees and charges is clearly presented, to help people avoid the prospect of taking out the wrong kind of loan and being left to struggle with debt.
But Which? executive director Richard Lloyd has criticised the plans, saying that the rules fall ‘far short of expectations. It has taken the industry months to agree to the most basic of codes, and largely amounts to a rebrand of many of the existing rules that have been flouted by some unscrupulous lenders for years.’
Action point: Payday loans – find out more about these types of loans
New rules for payday lenders
The code of practice contains ten key requirements for companies offering payday loans Under the new rules lenders that are members of the BCCA, the Consumer Credit Trade Association, the Consumer Finance Association and the Finance and Leasing Association must:
- give clear information about how a pay day or short-term loan works and an example of the price for each £100 borrowed, including fees and charges;
- not pressurise customers to take out a loan or extend (roll over) the term of an existing loan agreement;
- carry out a sound, proper and appropriate affordability assessment and credit vetting to check that customers can afford the loan;
- set out clearly how continuous payment authority works and the customer’s rights to cancel this authority, so they can decide if this type of repayment is acceptable to them;
- notify customers at least three days in advance of recovering payments through a continuous payment authority;
- freeze interest and charges if a customer is in financial difficulty and making payments under a repayment plan, or after a maximum of 60 days of non-payment.
Action point: How to deal with debt – read our in-depth guide if you’re struggling with debt
Lenders must abide by the code
Responding to the introduction of the code of practice for payday lenders, business secretary Norman Lamb said: ‘The industry must continue its commitment to root out rogue lenders and tackle bad practice.
‘I expect to see real results on the ground coming out of these additions to the lenders’ codes of practice and that the trade associations will undertake a proper assessment of how well they are working.’
More protection for lenders is needed, says Which?
Which? executive director Richard Lloyd was more cautious about the impact of the new rules, saying: ‘If this code is to be worth the paper it’s written on, far more needs to be done to enforce the rules and protect vulnerable people who are getting caught in a downward spiral of debt.
‘We welcome more robust credit checks but also want to see a cap on the amount that lenders can charge for defaults and an end to extortionate fees. We also want the Government to ensure the Office of Fair Trading has the resources it needs to properly police the industry.’