Wednesday, 5 December 2012

This is an historic moment, but more could be done right now to tackle rip off lenders

After fifteen years of campaigning on the issue, we are delighted that Government today included provisions within the Financial Services Bill to provide regulators with the power to cap the cost of credit agreements.
The Government amendment sets out a general power for the new Financial Conduct Authority to make rules that:
  • Prohibit the charging of certain types of fees which it considers to be unacceptable; and

  • Prohibit the charging of costs above an amount which it specifies as unacceptable.
Further to this, the FCA is to be provided with a power to prohibit ‘rollover’ lending, which is commonly used by payday lenders.
In the event of a breach of any such rules, agreements will be unenforceable, with any payments made by the borrower recoverable from the lender, and the lender will be liable to pay compensation to the borrower.
Welcoming the Government amendment, Damon Gibbons, said:

“This is an historic moment. After fifteen years of pointing out how money lenders have been exploiting the poorest households we finally have cross party agreement that direct action to cap prices and prevent other abuses is needed . The legal loan sharks are now on borrowed time. However, we have to move forwards as a matter of urgency and the FSA should now launch a consultation to help shape the new rules as early as possible.

But more can and must be done now to protect consumers. The FCA will not be taking on the responsibility for the regulation of consumer credit until 2014. In the meantime, and faced with a possible future crackdown, many money lending companies will inevitably take one last opportunity to rip off some of the poorest households in the country.

To prevent this, the Office of Fair Trading should immediately revise its Irresponsible Lending Guidance by indicating a level of credit costs the charging above which it will take as prima facie evidence of an irresponsible lending business model. We recommend that these ‘benchmark costs’ be initially set at £20 per £100 lent for payday loans and £65 per £100 lent for door to door money lenders.
It is now six years since the Competition Commission found that home credit lenders were making excess profits. At the time of the Commission’s inquiry, Provident Financial was charging £65 per £100 lent. It is now charging £82 per £100 lent, yet its cost of capital have not increased significantly and, with improved data sharing in place across this sector it has better information available to it to assess the risk of default. By our calculation, Provident has made at least £30 million in excess profit in the past two years alone. Insisting it reduces its prices back to the level charged in 2006 would be a good start on delivering on the promises to tackle the money lenders made in Parliament today."