UK Regulation

Regulation Of Payday Loans In The UK

We feel that further work needs to be carried out by the Office of Fair Trading to investigate the impact of banning payday loans within the context of the UK market.

Right now there is no specific payday regulation in the UK, payday lending is currently regulated by general consumer credit legislation.

The Consumer Credit Act 1974 states that lenders must obtain a consumer credit license from the Office of Fair Trading. Lenders who operate without a license face fines and/or imprisonment. Before the Office of Fair Trading issue the lender with a license, the OFT will first determine whether the lender is a ‘fit’ person.

In order to determine this, the Office of Fair Trading will consider a range of factors that include the lender’s business practices, any previous consumer complaints that may have been lodged, and any offence or conviction of violence or dishonesty. If, after issuing a license, the Office of Fair Trading determines that a lender is no longer ‘fit’, it has the power to revoke the lender’s consumer credit license.

In addition to this, the Consumer Credit Act 2006 (S. 25 (2B)) introduced an explicit requirement for the Office of Fair Trading to consider irresponsible lending as a factor in determining the overall fitness of a lender to hold a consumer credit license, with specific guidance issued to the credit industry in March 2010.

Key aspects of the guidance include additional requirements to:

1. Lend responsibly and ensure that they assess the borrower’s capacity to repay a loan in a ‘suitable’ manner, this includes the ability of the borrower to repay the loan without having to take out an additional loan.
2. State clearly the total cost associated with obtaining a loan and include the APR in any advertisement.
3. Provide borrowers with a sufficient explanation of the credit product, this should allow the borrower to understand whether he can afford the credit and also any risks associated with the credit product.
4. Clearly explain to consumers the effects of rolling over a loan and lenders should not roll over a borrower’s existing credit commitment for a short term credit product in a way that is unsustainable or harmful.
5. Advise whether a product is better suited for the short term rather than for long term borrowing.
6. In an online environment, a borrower should not be allowed to enter into a credit agreement until they have been provided with an adequate explanation about the features of the credit agreement and been provided with an opportunity to question the lender.

In addition to these guidelines, there have also been a small number of adjudications by the Advertising Standards Authority (ASA) in relation to payday lending.

In April 2008, the ASA upheld a complaint against the payday lender, the Money Shop for using advertising which suggested that the use of high rate, short-term credit was suitable to fund aspirational, non-essential purchases such as a party, a shopping trip or a holiday. The ASA ruled that this was likely to be seen as encouraging carefree , impulsive and frivolous spending on credit and concluded that the advertisement could encourage consumers to spend borrowed money irresponsibly.

In October 2009, the ASA upheld a complaint against the online payday lender Quickquid, for failing to include the APR of 2,000% in its TV advert. The ASA ruled that the APR had to be disclosed as the advert emphasised the speed of the loan process and that this constituted an incentive for people to take up their offer.

In July 2010, the ASA upheld a complaints against online payday lender Wonga.com Ltd for portraying the act of taking out a loan in an overly whimsical fashion, including using laughter when the suggestion was made that a bank may offer a better alternative. The failure to give greater prominence to the APR than other information presented in the ad concerning the cost of borrowing also caused it to breach the Consumer Credit (Advertisements) Regulations 2004.

UK Industry Associations

In addition to the activities of UK regulators there are also two industry bodies that represent payday lenders in the UK, the British Cheque & Credit Association and the Consumer Finance Association, both of which impose rules on their members. However, the full extent of these rules is currently limited.

The British Cheque & Credit Association (BCCA) acts as an industry body for ‘unsecured loan products where the intended repayment period is 6 months or less’ (but excluding pawnbroking and home credit).

The BCCA has issued guidance on best practices for payday lenders and these include a requirement that its members should not issue more than six consecutive loans to a borrower. However, it should be noted that details of this membership requirement is not available from the BCAA website, and the BCCA has not obtained ‘approved’ status from the Office of Fair Trading under its scheme for quality assuring codes of practice.

The Consumer Finance Association (CFA) which has members of both high street payday lenders and lenders who operate solely online. The CFA does not currently have a code of conduct. It does, however. state that it encourages high standards from its members in terms of transparency, customer service and responsible lending.

Ref: BCCA website (http://www.bcca.co.uk/index.asp)
Ref: CFA website (http://www.cfa-uk.co.uk/aboutcfa.html)