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- a commitment to inform customers three days before money is withdrawn;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.
Notes to Editors
1. The BIS Select Committee report was published on 7 March at http://www.parliament.uk/business/committees/committees-a-z/commons-select/business-innovation-and-skills/news/debt-management-chairmans-comments/
2. The Government’s full response will be published by the BIS Select Committee in due course.
3. The update for the University of Bristol Personal Finance Research Centre’s report can be found at http://www.bis.gov.uk/policies/consumer-issues/consumer-credit-and-debt
4. The four trade associations that have agreed to the commitments are the Consumer Finance Association (CFA), Finance and Leasing Association (FLA), British Cheque and Credit Association (BCCA) and Consumer Credit Trade Association (CCTA).
5. The full text of the commitments to be implemented by 25 July 2012 are:
Following discussions, the trade associations for the payday and short-term loan industry have agreed to add to their Codes of Practice by 25 July 2012 so that they deliver enhanced consumer protections, with specific commitments as follows:
1. A Good Practice Customer Charter to be published by 25 July 2012 setting out in a clear, concise and user-friendly format what customers of payday and other short-term loans should expect from their lender.
This Charter will:
· highlight lenders’ key commitments to customers, including clear information about how the loan works, the price per £100 borrowed as well as the APR, and charges for extending the term of the loan (‘rolling over’) and default;
· explain how lenders will communicate with customers and how customers can contact them;
· explain how they assess if customers can afford a loan;
· explain how to complain if there is a problem and signpost customers to sources of free and independent debt advice and relevant helplines;
· sit along with each trade association’s individual Codes and be easily accessible via lenders’ websites or at business premises.
2. Increased transparency about loan repayments to help consumers make better informed decisions and making sure that continuous payment authority is not used inappropriately for those in financial difficulty. Lenders have committed to:
· only extend (‘rollover’) the term of their loan at the specific request of the customer and after reminding the customer of the risks of extending a short term loan;
· provide consumers with a clear explanation of how continuous payment authority works and how payments will be deducted from their bank accounts. This will help consumers decide whether this type of repayment is acceptable to them before they take out the loan;
· set out consumers’ rights to cancel a continuous payment authority before they take out a loan, reminding them that if they cancel they will still owe any outstanding debt and the need to provide an alternative method of payment on the due date to avoid going into default;
· always pre-notify consumers by email, text, letter or phone at least three days in advance before attempting to recover repayment using continuous payment authority on the due date. This notice will encourage customers to contact the lender if they are in financial difficulties and cannot repay;
· Where customers have failed to make repayment on the due date, send further regular reminders to customers when a continuous payment authority is being used, providing a contact point for the customer if they are experiencing repayment problems;
· Repay any amounts recovered by the continuous payment authority if the customer is in financial difficulty.
3. More help for customers in financial difficulty: Lenders have committed to:
· freeze charges and interest if a reasonable repayment plan can be agreed, or after a maximum of 60 days of non-payment;
· engage sympathetically and positively with the customer and split the loan into realistic repayments to be repaid over a longer period, where appropriate;
· provide customers with a ‘breathing space’ of 30 to 60 days where they are making a genuine effort to agree a repayment plan.
4. Robust credit assessments: Lenders have committed to:
· undertake sound, proper and appropriate affordability assessments and credit vetting as part of each loan application and before the term of a loan is extended (‘rollover’);
· check the suitability of the loan given the customer’s situation
· remind the customer that the loan is only suitable for borrowing over a short-term and not over a longer-term.
5. Effective compliance monitoring of members by their trade associations to ensure improved self-regulation and root out poor practice in the payday and short-term markets. The trade associations have committed to:
· meaningful and enforceable sanctions in their Codes (up to and including expulsion from membership for serious non-compliance)
· delivering rigorous internal complaints procedures;
· taking a proactive approach to monitoring compliance with their codes and regular meetings with the OFT to discuss areas of concern in the market.
· undertake a review of the effectiveness of these changes to the Codes 12 months after they come into effect and in light of the OFT’s current study of the market and publish the findings.
Definition: Payday and other short-term loans include an agreement where you can borrow a small amount of money (usually between £50 and £800) and repay the loan over a short period (typically one or two months).
 Where contact is being made by telephone, this timeframe will be influenced by the customer actually receiving the call.