Influential report recommends curb on rolling over of loans and demands data sharing to reduce multiple debts
Payday lenders should be forced to limit the rolling over of loans, stop allowing customers to switch from one lender to another, and to share information about their customers with other lenders, the business, innovation and skills committee has recommended.
In a report – which described the payday lending and debt management industry as opaque and poorly regulated – the influential committee said the government should outline a timetable within six months for deciding whether control of consumer credit will be transferred from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA), a new regulator replacing the Financial Services Authority.
One of the FCA's first duties should be to address payday lenders' use of continuous payment authorities – payment instructions that cannot be ended by the borrower – unless lenders commit to stop using them.
The committee's chairman, Adrian Bailey MP, said: "During these difficult economic times, increasing numbers of people up and down the country – not least some of the most vulnerable members of our society – are relying on the provision of consumer debt management services and payday loans to make ends meet.
"And yet this industry remains opaque and poorly regulated. Despite a government consultation that ended almost a year ago, little has been done to remedy the situation."
Payday lenders offer short-term loans to borrowers, typically up to a maximum of £1,000. But interest rates and charges are high – APRs can reach as much as 16,000% – and lenders have been accused of targeting low-income borrowers who often end up rolling over their borrowing and accruing large debts.
One of the OFT's frustrations in regulating credit companies is that it can take years from the point of deciding to revoke a licence, to getting through the appeal process, to stopping a firm from lending. The committee has called for a fast-track procedure introduced to suspend credit licences where businesses have failed to adhere to the rules. It also said higher licencing fees should be put in place for higher risk credit businesses, and the regulator should also be given the power to ban harmful products.
Bailey said: "Payday loans, by their very nature, appeal to those in serious financial need, some of whom will have low levels of financial literacy. We must be certain that this industry adheres to the highest standards – either through the codes of practice that are currently being developed or, failing that, by the new regulator."
The OFT announced an investigation of payday lenders last week, saying it would visit 50 major companies and survey industry and consumer organisations to determine whether companies were complying with the Consumer Credit Act and its guidance on irresponsible lending.
Neil Munroe, a director of credit reference agency Equifax, says payday lenders had already approached his company for information about sharing data about customers, "and the interest has heightened since announcement of the OFT review".
Sharing data about customers would enable payday lenders to check that they are not lending irresponsibly to people who have multiple loans and who are rolling debt over from one payment period to the next. The data could also be made available to mainstream lenders such as high street banks, helping to rehabilitate the credit records of higher risk borrowers who repay payday loans on time.
However, about 200 lenders are believed to be offering payday loans, many of which are trying to maximise profits until increased regulation makes the UK an unattractive business environment.
Sarah Brooks, director of financial services at Consumer Focus said: "As the committee has highlighted, the [OFT] rules themselves are not stringent enough to ensure payday lenders are lending responsibility and checking their customers' ability to repay loans.
"The payday loan industry has had the chance to put its own house in order but has failed to stamp down on irresponsible lending. In the meantime, consumers, often those on the lowest incomes, are losing out.
"We would urge the government to take account of these sensible, proportionate and considered recommendations and ensure that they are introduced quickly."
The report stopped short of recommending a cap on charges, on the grounds that it could reduce availability of credit to those who need it most.