New York Times, October 3, 2013
British regulators announced plans on Thursday to impose stiff new rules next year for payday lenders, whose business has grown sharply since the financial crisis.
The new rules in Britain will include requirements that lenders properly evaluate whether a consumer can afford such a loan and to limit the number of times the loan can be rolled over. Lenders also will be required to provide consumers with sources of debt advice before refinancing.
Payday lenders also will be required to include risk warnings in advertisements, which have proliferated on British daytime television, many offering loans of up to £1,000 ($1,620) at a time.
Firms will face fines for violations of the rules.
The Financial Conduct Authority, which is set take over regulation of consumer credit firms in April 2014, said the proposed changes were intended to make promotions by lenders “clear, fair and not misleading.”
The move comes as regulators in the United States crack down on what they [say are] excess interest rates charged by payday lenders on such loans.
In August, the New York State financial regulator sent letters to 35 online lenders, instructing them to “cease and desist” from offering loans that violate local usury laws. The federal Consumer Financial Protection Bureau has also been examining short-term, payday-style loans.
In Britain, short-term, high-cost lending has grown to an estimated £2 billion industry in 2011-2012, from about £900 million in 2008-2009, according to the Financial Conduct Authority.
Consumer advocates have complained that payday lenders have pressed consumers into taking out loans they cannot afford, locking them into a cycle where it is difficult to ever exit.
The archbishop of Canterbury, in a speech to the House of Lords in June, said the Church of England and other local institutions should work to develop an alternative system of credit unions, instead of payday lenders being the only alternatives for consumers.
“For the credit union movement to be successful and sustainable, and other forms of local finance to develop, we need a bottom-up movement of local organizations working to change the sources of supply,” said the archbishop, the Most Rev. Justin Welby. “It will take many years — 10 to 15 years — but it must start now.”