I was greatly encouraged to see the Financial Conduct Authority (FCA) introduce new rules on payday lending, ensuring that interest rates and fees on all short-term credit loans are capped. Following this ruling, people who take out this type of credit do not pay back more than twice the amount borrowed.
The FCA has also tightened the supervision of payday lenders, restricting how often loans can be rolled over and ensuring that lenders can no longer take money directly from a customer’s account. As a result, the number of approved loans of this kind has shrunk from 800,000 per month to 300,000 per month. All this is good news. However, the level of interest charged for payday loans remains exorbitant.
Well-publicised problems with regards to payday and short-term lending are always brought into sharp focus in the run-up to Christmas. In austere times, many people understandably turn to this type of credit to make purchases. Indeed, the Money Advice Service commented that 1.4 million people across the UK are expected to take out some form of short-term credit to help fund Christmas.
Recognising that more action is needed, following a Payday Lending Summit in Glasgow, the SNP Government published a 12 step action plan, to tackle the clustering of Pay Day lenders and gambling shops in Scotland’s town centres.
The majority of this plan has since been implemented, including a new online advice service – The Financial Health Service – and proactive promotion of Credit Unions as alternative lenders. Provisions have also been made in Scottish planning policy to counteract the over-proliferation of payday lending in our town centres.
There is clearly more to do on this issue however. I recently worked with StepChange, a debt charity which informed me that 12% of people contacting them from my North Ayrshire and Arran constituency had a payday loan debt, with an average debt balance of £1,326.
Despite action by government, not everyone gets a fair deal, even under the terms of such loans. Moreover, there is not nearly enough emphasis on lenders to ensure they identify vulnerable customers and refer them to seek advice. Without this, people can become trapped in a cycle of repeated borrowing and as their debt increases, so does the stress and anxiety that goes with severe money problems.
Whilst payday lending can be a legitimate and useful source of short-term finance, people confronted with spiralling debts that they cannot manage should not be targeted. Customers who cannot quickly repay debt could pay more in interest in one month than with a credit card in a year.
The FCA is currently undertaking a review of the high-cost credit market, including payday loans, pawn-broking, home-collected and catalogue credit and logbook loans, to address the key areas of customer disadvantage, with their findings to be published next summer. We must ensure that lending practices unfit for purpose are discontinued and that best practice is shared for the benefit of consumers, so that the burden of debt is minimised wherever possible.