The FCA has released recommendations on how it plans to regulate the payday loans sector when it takes over from the Office of Fair Trading (OFT) as the industry regulator for consumer credit in April 2014.They are planning a range of measures to try to ensure consumers are better protected from falling into potential traps.One of the FCA’s plans is to ensure “cigarette style warnings” are placed onto the adverts of payday lenders to highlight the potential dangers to customers.
Cigarette Style Warnings
The comparison to “cigarette packet warnings” brings up some interesting thoughts.Since the introduction of cigarette packet health warnings being implemented in the UK in 2003, there has been no significant drop in the rates of people who choose to smoke.The 1970’s and early 80’s saw the public perception against smoking begin to change after evidence slowly filtered through that smoking would have a detrimental effect on your health. This is when the smoking rates dropped the most dramatically.
Statistics from ASH (Action on Smoking and Health) show that in 1974 51% of men and 41% of women were smokers; however 20 years later, in 1994 28% of men and 26% of women were smokers. Almost 20 years later on figures indicate that 21% of men and 19% of women are smoking, showing that although numbers of smokers are decreasing all the time, it may have hit a bit of a plateau.
It seems that imposing “cigarette style” warnings may not have the biggest effect on persuading the public against payday loans.You can educate people all you want, but many will take the risks if there is no immediate example of the problems it can cause.What is similar to the smoking situation is that the public already has a very mixed view of payday lenders. Many see them as a bad thing.
However, this year Wonga made £1m in profit each week through their loans – this helps to show that the public view of this sort of product is different from the individual view.Wonga and their competitors have hundreds of customer reviews applauding their service and reporting that they would be happy to recommend it.A key reason for the potential ineffectiveness of the risk warning is the difference in how and where you use the two products.
Smoking is something you do in public or socially and within an area where you may feel judged by others for smoking. However if you apply for a loan, it is a very private decision, and is unlikely to be discussed in public. Unlike smoking and there is certainly no sign of whether anybody has used one. Therefore persuading people not to use payday loans by creating a stigma will be hard.
Affordability checks are likely to work better than warnings. This is because affordability checks do not need to try to convince anyone not to do something; they are black and white, you are either allowed to borrow or you are not.Lenders that don’t enforce affordability checks are putting themselves and their customers at risk. They are at risk of losing money if customers cannot afford to repay, and customers are driven further into debt. This is the main complaint about payday lenders; once you get into the habit of using them to meet the repayments on another payday loan it is hard to break the cycle.
Let’s not forget that irresponsible lending is one of the factors that led to the global financial crisis that we have just begun to emerge from.One area that there has been pressure on is to introduce a price cap, which would limit the APRs that companies are allowed to charge. However, many are not in favour of such tough restrictions being placed upon the lenders. Some researchers at the University of Bristol found that, whilst a cap may improve the practices of lenders, there was also the potential for lenders to charge the maximum amount allowed by the potential cap.
The FCA will also be capping the amount of times a customer can “rollover” a loan. However, if affordability checks are imposed properly, they should not need this recommendation to be put in place. An affordability check should ensure that there is no need for a loan to be rolled over unless the customer finds themselves in exceptional circumstances.
What The Experts Say
MoneySavingExpert.com founder Martin Lewis welcomed these changes, but his statement does not cover the inclusion of an affordability check.
The report card on the changes is as follows:
Limiting rollovers to prevent loans ballooning into uncontrollable beasts, good.
Cracking down on lenders who daily try to grasp every penny directly from people’s accounts by limiting CPAs, good.
“Waiting to see whether a total cost cap is needed, passable. Wealth warnings too are welcome if the implementation is right It would’ve been better to do this straight away, but if payday firms continue their usual ways of operating it’ll happen soon – though I could be gloriously surprised and they’ll improve.
It seems that Martin Lewis is totally against payday lenders and siding completely with the consumer, rather than remaining open and looking at the rulings from both sides and allowing payday loan companies to operate as part of a properly regulated industry and fulfil a genuine need to customers.However, the FCA’s chief executive Martin Wheatley delivered a more neutral statement when commenting on the changes.
“We believe that payday lending has a place; many people make use of these loans and pay off their debt without a hitch, so we don’t want to stop that happening.”
The changes made to the regulation of payday lenders could be good for everyone.
The customer will hopefully be able to find more confidence in their choice of finding non-traditional forms of finance, and lenders can be more confident that their practices will not have a negative effect on the lives of their customers should they hit rocky ground financially.
The key piece of advice is the inclusion of compulsory affordability checks. This will be the acid test for customers and will then be solely down to the customer to manage their repayments.This is also a barrier for customers at the very start of the application process, meaning that measures like limiting rollovers and CPAs should have to come into force much less often.