The UK’s Financial Conduit Authority (FCA) has recently outlined plans to crack down on the country’s payday loan industry when it takes over as the new consumer credit watchdog in April 2014.
The financial regulator announced that it will now require short-term lenders such as Wonga to carry out mandatory affordability checks on borrowers, as well as restricting the number of loan roll-overs to two.
The FCA also intends to limit to two the number of times loan issuers can use a continuous payment authority (CPA) to retrieve money directly out of borrowers’ accounts.
The decision comes in the wake of a widely publicised campaign against payday lenders endorsed by several prominent public figures, including the Archbishop of Canterbury, Justin Welby.
A recent government survey revealed that payday lenders were failing to comply fully with standards designed to protect borrowers.
Among 4,000 people surveyed, nearly 1,000 were pressured to extend their loan, while half said they had not been made aware of the risks involved in doing so.
Such a failure to self-regulate is what prompted government action, explained business minister Jo Swinson. "We warned the industry months ago that if it didn’t get its house in order we would step in" she said.
Though welcomed by many as an important step forward in consumer protection, and described by Russell Hamblin-Boone, the CFA’s chief executive, as "an opportunity to set a bar over which irresponsible lenders will struggle to jump", criticism has been voiced by those who consider the measures too lenient.
Chris Leslie, finance spokesman for the UK Labour party, accused lenders of "making a mint while ministers sit on their hands", amidst opposition calls for an immediate cap on short-loan interest rates.
Unite, the UK and Ireland’s largest union representing 1.4m workers across all sectors of the economy, dismissed the measures as "too little, too late".
Len McCluskey, the union’s general secretary, said: "They fail to deal with the real reason people who borrow from a payday lender end up in deep financial trouble, which is the criminally high interest rates these lenders can get away with."
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