Jul 1, 2013
Payday loan companies face an advertising ban if they fail to reform, the new financial regulator warns at a £ 2bn industry summit. But Channel 4 News hears that an advertising ban is not enough.
An advertising ban is being considered by the new Financial Conduct Authority (FCA), as it prepares to take over regulation of the payday lending industry next April.
Managing Director Martin Wheatley said a ban could be imposed if it was felt that the problematic advertising for payday loans could not be dealt with in any other way.
“I think there are a lot of problems with advertising – this is something that has been commented on, targeting young people, students, children in some cases,” he said.
“If payday loan companies are really targeting a particular income bracket – people with jobs – why are they advertising on television during the day? “
Payday loans are hampered by bad practices, but more and more people are turning to this very high cost credit to cover the essentials or to pay off existing debts – Richard Lloyd, which one?
Lenders, ministers, charities and regulators were in the midst of discussions Monday on how to better regulate the payday lending industry, which is under increasing pressure to reform. Companies such as Wonga and The Cash Shop are just a few of those that could face a crackdown on their advertising after the summit.
Hosted by Consumer Affairs Minister Jo Swinson, the purpose of the meeting is to examine whether more can be done to tackle issues within the industry and establish a course of action.
Half of those who take out payday loans are unable to repay them and are forced to roll over their loans, often at a very high interest rate.
Debt Charity Una Farrell Stage change told Channel 4 News that the summit and the proposed advertising ban were steps in the right direction.
But she said it was too late to wait for the FCA to take over in April. “We must act now. We have seen the number of people contacting us with payday loan concerns doubling from 2011 to 2012 – this cannot continue, ”she said.
“The proposed advertising ban is not necessarily a bad thing, but the focus for us is how they are (loans) marketed – that they have to be balanced against 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 – by the numbers*
– 4% of Britons take out payday loans every month – around 1 million households,
– 2.7 million payday loans could not be repaid on time, if at all, in 2011/12,
– About four in ten people are worried about the level of debt in their household,
– For four in ten people who take out payday loans, they are used to pay for essential goods such as food or fuel.
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 the regulator’s companies to clean up their act – or risk losing their license.
Ms Swinson said she had “specific concerns” about the way payday loans were being marketed. The use of phrases such as “instant cash”, “secured loan” and “no questions asked” in the advertisement has been criticized by the MANY TIMES in his investigation.
However, a cap on the total amount that can be borrowed from a lender, a move supported by Archbishop of Canterbury Justin Welby and Labor, has so far been rejected by ministers.
Shadow Treasury Minister Chris Leslie said “urgent action” was needed and accused the government of ducking “from restricting predatory pricing and exorbitant interest charges”. MP Stella Creasy, who has been a vocal activist against legal “loan sharks” was not invited to attend the summit.
The OFT dismissed the industry for investigation at the end of June after raising concerns over the ‘renewal’ of clients’ loans when they were unable to repay them as individuals were trapped with a business.
The regulator has found that up to half of lenders’ income comes from additional fees and interest on loans that cannot be repaid.
Consumer charities have long called for reform of the industry that consumers “increasingly” look to in times of financial need, according to Which? The organization’s executive director Richard Lloyd said the government should ban excessive fees, restrict the number of payday loan renewals and impose stricter rules on advertising.
“Payday loans are hampered by bad practices, but more and more people are turning to this very high cost credit to cover the essentials or pay off existing debts,” he said. “We also want more action from the government to fight this toxic market.”
Credit crisis – by the numbers*
– One in four people with a personal loan uses it to repay other loans,
– Eight in ten of us (79%) – around 38.5 million adults – use some form of credit
– Three in 10 credit users say they dislike debt, but consider it a necessary part of their life.
* Who ?, OFT survey and change of stage
While the competition commission has the power to ban or restrict 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 have the power to cap interest rates and limit or prohibit the number of rollovers lenders can offer.
Amid calls for reform, the Institute of Economic Affairs warned that the restriction on payday loans “will hit the poorest hardest” and said politicians were sending “mixed messages”.