Commitments include a promise to increase transparency about repayments and to introduce robust credit and affordability assessments to make sure loans are suitable for the borrower
Payday loan companies have promised to improve the way they sell credit to borrowers under voluntary guidelines agreed with the government.
Lenders have until 25 July 2012 to add the new commitments to their existing codes of practice. These include a promise to increase transparency about loan repayments so borrowers are not surprised by hidden payments, robust credit and affordabillity assessments to make sure loans are suitable for the borrower, and more help for customers in financial difficulty by freezing charges and interest.
Where borrowers have failed to make repayments on the due date, lenders have also agreed to send further regular reminders to customers, to engage “sympathetically and positively” with them, and to split the loan into realistic repayments to be made over a longer period, where appropriate.
Earlier this week, payday loan company Wonga was told by the Office of Fair Trading (OFT) it must improve its debt collection practices, after it emerged it had sent letters to customers who were struggling with repayments accusing them of committing fraud.
The voluntary guidelines follow discussions between the government and the four trade associations that represent more than 90% of the payday and short-term loan industry. Lenders not covered by the associations will not be bound by the new commitments. It also stops short of requiring firms to share data about their own lending through the credit reference agencies, something many experts believe would be the most simple and effective way to ensure sensible lending.
Business minister Norman Lamb said the agreement was a “step in the right direction” but that he wanted further action, particularly on the use of continuous payment authorities (CPAs). CPAs are payments set up using a debit or credit card that effectively authorise a company to take payments at random from a card. Such arrangements can often be hard to cancel.
Sarah Brooks, director of financial services at Consumer Focus, said: “We are pleased to see the minister wanting further action on CPAs. We have long-held concerns that lenders rely on being able to dip into people’s accounts, often without their knowledge, instead of ensuring that they carry out proper credit checks in the first place. Debt agencies report that the misuse of CPAs can lead to huge hardship with consumers often not left with enough to pay priority bills such as housing, heating and food.”
Brooks said she welcomed the new codes of practice, but added: “The measures outlined today have the potential to make a difference for consumers, but this very much depends on the detail of what is finally agreed.”
Gillian Guy, chief executive at Citizens Advice, also welcomed the news but said: “To make this really bite we would also like to see the codes monitored independently, with input from consumer groups.”
The four trade associations involved are monitoring compliance with the codes of practice, with the ultimate sanction being expulsion from the trade association.
Payday loan companies are continuing to be investigated by the OFT, which earlier this year launched a review of the sector amid concerns some lenders are taking advantage of people in financial difficulty.
When the OFT report is published it is expected it will require the industry to deliver further measures to address problems with payday lending. The government said it is also considering giving the OFT powers to suspend credit licences with immediate effect, and will make an announcement on this shortly. Currently, it can take years for a lender to lose its licence after the OFT is satisfied it has broken enough rules that it no longer deserves one.
National Debtline said that it received 4,725 calls for help with payday loans in the first three months of 2012, 58% more than the previous quarter and 133% more than the same quarter in 2011.