Summit puts payday loans in the spotlight

An advertising ban is being considered by the new Financial Conduct Authority (FCA), as it prepares to take over the regulation of the payday loan industry next April.

Chief Executive Martin Wheatley said a ban could be issued if it was felt that problematic advertising for payday loans couldn’t be dealt with in any other way.

“I think there are lots of problems with advertising – that is one element that has been commented on, the targeting of young people, students, children in some cases,” he said.

“If payday loan companies are genuinely targeting a particular income bracket – people with jobs – why do they advertise on daytime television?”

Payday lending is dogged by poor practice yet people are increasingly turning to this very high cost credit to cover essentials or pay off existing debts – Richard Lloyd, Which?

Lenders, ministers, charities and regulators were deep in discussion on Monday about how to better regulate the payday loans industry which has come under increasing pressure to reform. Firms such as Wonga and The Cash Shop are just some of those which could face a crackdown on their advertising following the summit.

Hosted by Consumer Minister Jo Swinson, the aim of the meeting is to look at whether more can be done to clamp down on problems within the industry and set out a plan of action.

Half of those who take out payday loans are unable to pay them back and are forced into rolling over their loan, often at a very high rate of interest.

Una Farrell from debt charity Step Change told Channel 4 News that the summit and proposed advertising ban were steps in the right direction.

But she said that waiting until the FCA takes over in April is too late. “We need action now. We saw a doubling in the number of people contacting us with concerns about payday loans from 2011 to 2012 – that cannot continue,” she said.

“The proposed ad ban is not necessarily a bad thing, but the focus for us is how they’re (loans) marketed – that they should be balanced about the risks of using high cost credits,” she added.

The average amount owed on payday loans by those who contacted Step Change was £1,657.

Credit crisis – in numbers*
– 4 per cent of Britons take out payday loans each month – around 1 million households,
– 2.7 million payday loans couldn’t be paid back on time, or at all, in 2011/12,
– Around four in 10 people are worried about their household level of debt,
– For four in 10 people who take out payday loans, they are used to pay for essentials like food or fuel.

Industry investigation

The summit comes just days after the Office of Fair Trading (OFT) referred the industry to the competition commission for investigation, and follows a stern warning to firms from the regulator to clean up their act – or face losing their licence.

Ms Swinson said she had “specific concerns” about the way payday loans were marketed. The use of phrases such as “instant cash”, “loan guaranteed” and “no questions asked” in advertising was criticised by the OFT in its investigation.

However a cap on the total amount it is possible to borrow from a lender, a move backed by Archbishop of Canterbury Justin Welby and Labour, has so far been rejected by ministers.

Shadow Treasury Minister Chris Leslie said “urgent action” was needed, and accused the government of ducking “clamping down on predatory pricing and extortionate interest charges”. MP Stella Creasy, who has been a fierce campaigner against legal “loan sharks” was not invited to attend the summit.

Read more: Lenders of last resort? Channel 4 News checks out the alternatives to payday loans

Revenue from interest

The OFT referred the industry for investigation at the end of June after raising concerns about customers’ loans being “rolled over” when they were unable to pay them back, with individuals being trapped with one firm.

The regulator found that up to half of lenders’ revenues came from the extra charges and interest from loans that can’t be paid back.

Consumer charities have long called for reform of the industry that consumers are “increasingly” turning to in times of financial need, according to Which? The organisation’s Executive Director Richard Lloyd said the government should ban excessive charges, restrict the number of times a payday loan can be rolled over, and have stricter rules about advertising.

“Payday lending is dogged by poor practice yet people are increasingly turning to this very high cost credit to cover essentials or pay off existing debts,” he said. “We also want more action from the government to tackle this toxic market.”

Credit crisis – in numbers*
– One in four people with payday loans use it to repay other credit,
– Eight in ten of us (79 per cent) – around 38.5 million adults – use some form of credit
– Three in 10 credit users say they don’t like debt but see it as a necessary part of their life.
*Which?, OFT investigation and Step Change

New regulator

Although the competition commission has the power to ban or limit products, and shake up the industry, its investigation could take up to 18 months.

However from April next year, the Financial Conduct Authority will oversee lenders and will have the power to cap interest rates and limit or ban the number of rollovers lenders can offer.

Amid calls for reform, the Institute of Economic Affairs warned that restricting payday loans would “hit the poorest the hardest” and said that politicians were sending out “mixed messages”.