Which? response to announcement on payday loans

In response to today’s announcement on payday loans Which? executive director Richard Lloyd said:

“It’s time for a crackdown on irresponsible lending, especially for high cost lenders who are exploiting consumers struggling in the current economic climate, so we’re pleased to see the Government planning tough action.

We want to see the regulators immediately crack down on payday lenders who flout the rules and for new powers to be used to take strong, proactive action to clean up the whole of the credit market.”

Which? has called on the Government to make sure that the new regulator, the Financial Conduct Authority (FCA), takes early and tough action to clean up the whole of the credit market and give consumers the confidence to use credit responsibly.

Which? has set out five ways the FCA should act to clean up credit and send a clear message to irresponsible lenders.  Which? wants all lenders to voluntarily clean up their act, otherwise they should expect to face tough action from the regulator.

Our recent findings on credit include:

  • 79% of people, approximately38.5 million adults, use some form of credit.
  • Households resorting to high-cost credit after exhausting cheaper forms of credit, with half of people who used a payday loan or unauthorised overdraft having been rejected for credit within the past year.
  • People being locked into a vicious cycle, taking on more debt just to get by, with a quarter (24%) of people with payday loans using it to repay other credit.
  • Over a quarter of credit users (28%) say they don’t like debt but see it as necessary part of their life.
  • More than half (57%) of people with credit card debt use their credit card to pay for rent, bills or essentials, like food.
  • Credit users are less resilient to financial shocks – one in five (21%) have no savings buffer to pay for unexpected bills and a quarter (24%) say they would have to cut back on essentials in a financial emergency.

Notes to editors:

Which? has set out five ways the FCA should act to clean up credit and send a clear message to irresponsible lenders:

  1.  Ban excessive default fees and charges – the FCA should require that the level of default charges should reflect lenders’ actual costs, and there should be a cap on the total amount of default charges.
  2. Crack down on irresponsible lending – the FCA should enforce strong rules on affordability checks that properly take into account a borrower’s income, expenditure and ability to repay the debt, including any outstanding credit commitments.
  3. Put people in control of their credit – end unsolicited increases in credit limits, unauthorised overdrafts should be opt-in only and there must be a limit to the number of times high-cost loans can be rolled over.
  4. Clear and transparent information – the cost of credit and all fees and charges should be transparent, and for high-cost credit should be displayed clearly as pounds per £100 borrowed over 30 days. Credit products should come with clear health warnings explaining the consequences of missed payments.
  5. Swift and early intervention for people in financial difficulty –the FCA should force lenders to freeze charges for borrowers in difficulty, and prevent them from charging interest on high-cost loans beyond 30 days after borrowers default. Lenders must help borrowers in difficulty and refer them to free independent debt advice.

The latest information and research on consumer credit and spending can be found on the Which? Consumer Insight Tracker http://consumerinsight.which.co.uk/

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