FCA to Forge New Rules for Payday Loan Companies

The Financial Conduct Authority plans to possibly ban advertising and how quickly loans can be made by payday lenders, as part of its crackdown on the industry, which lawmakers have described as 'preying on the vulnerable'.

The FCA and politicians said at a conference in London that there was a broad recognition of the need for better practice in the payday loan market and that new rules would have to be installed to prevent consumers falling into a debt spiral.

"An interesting question is that if payday lenders genuinely targeting particular income bracket, people with jobs, why do they advertise on daytime television?" said the FCA's chief executive Martin Wheatley.

Wheatley said a blanket ban on advertising was an option and that the FCA could become more prescriptive over advertising regulations if consultations, due to be launched in September.

The finance ministry's economic secretary Sajid Javid added "what the industry understood today from the summit is they now have to deal with a regulator [the FCA] with some real teeth."

"They're going to feel the hand of the regulator on their shoulder."

The Office of Fair Trading (OFT) hands over regulation of the sector to the FCA in April 2014.

The payday lending sector is worth £2bn ($3bn, €2.3bn) in the UK and is more than double the amount from 2008 to 2009.

Current figures show that this corresponds to between 7.4 and 8.2 million new loans.

Despite these loans being described as one-off short term loans, costing an average of £25 per £100 for 30 days, up to half of payday lenders' revenue comes from loans that last longer and cost more because they are rolled over or refinanced.

Interest rates on the short term loans can reach highly inflated levels. For example one of the UK's largest payday loan companies, Wonga, details representative APR of 4214% on its website.

However, the government's consumer minister Jo Swinson said the FCA could consider a limit on the overall cost of credit but a cap on annual rates would be unlikely.

Last month, the OFT it decided to refer the payday loan market to the Competition Commission (CC) because it couldn't tackle the issues that "prevent, restrict or distort competition" under existing laws and guidance.

The payday industry now faces a CC inquiry.

At the end of May, the Public Accounts Committee urged the Financial Conduct Authority to crack down on payday loan companies, which use 'predatory techniques' and lend money to consumers at astronomical interest rates.