House of Commons Committee · Payday Loans: Responses to the Committee’s 7th Report of Session 2013-14 5 Rollovers and Continuous Payment Authorities (CPAs) Payday loans should

HC 1136 Published on 24 March 2014

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House of Commons

Business, Innovation and Skills Committee

Payday Loans: Responses to the Committee's 7th Report of Session 2013-14

Fourth Special Report of Session 2013–14

Ordered by the House of Commons to be printed 4 March 2014

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Business, Innovation and Skills Committee

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Mr Adrian Bailey MP (Labour, West Bromwich West) (Chair) Mr William Bain MP (Labour, Glasgow North East) Mr Brian Binley MP (Conservative, Northampton South) Paul Blomfield MP (Labour, Sheffield Central) Katy Clark MP (Labour, North Ayrshire and Arran) Mike Crockart MP (Liberal Democrat, Edinburgh West) Caroline Dinenage MP (Conservative, Gosport) Rebecca Harris MP (Conservative, Castle Point) Ann McKechin MP (Labour, Glasgow North) Mr Robin Walker MP (Conservative, Worcester) Nadhim Zahawi MP (Conservative, Stratford-upon-Avon) The following members were also members of the Committee during the Parliament: Luciana Berger MP (Labour, Liverpool, Wavertree) Jack Dromey MP (Labour, Birmingham, Erdington) Julie Elliott MP (Labour, Sunderland Central) Margot James MP (Conservative, Stourbridge) Dan Jarvis MP (Labour, Barnsley Central) Simon Kirby MP (Conservative, Brighton Kemptown) Gregg McClymont MP (Labour, Cumbernauld, Kilsyth and Kirkintilloch East) Ian Murray MP (Labour, Edinburgh South) Nicky Morgan MP (Conservative, Loughborough) Chi Onwurah MP (Labour, Newcastle upon Tyne Central) Rachel Reeves MP (Labour, Leeds West) Mr David Ward MP (Liberal Democrat, Bradford East)

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Payday Loans: Responses to the Committee’s 7th Report of Session 2013-14 1

Contents Page

Fourth Special Report 3

Appendix 1: Government Response 3

Appendix 2: Response from the Financial Conduct Authority 9

2 Payday Loans: Response to the Committee’s 7th Report of Session 2013-14


Fourth Special Report

The Committee published its Seventh Report of Session 2013–14, Payday Loans, on 20 December 2013. The Government’s Response was received on 19 February 2014 and is appended to this Report at Appendix 1. The Financial Conduct Authority’s Response was received on 28 February 2014 and is appended to this Report at Appendix 2.

Appendix 1: Government Response

Introduction

We welcome the increased focus, across the political spectrum, on the payday loan sector. Both the Government and the Official Opposition are aware that changes need to be made in this area. While we welcome these initiatives, we believe that further action, including stronger regulation, is necessary to protect consumers. (Paragraph 14)

The Government is committed to tackling the causes of consumer detriment in the payday lending market. Payday lenders, along with the rest of the consumer credit market, will come under the Financial Conduct Authority’s (FCA) new, more robust regulatory regime on 1 April.

The FCA will thoroughly assess every high-cost short-term lender’s business model and compliance before being allowed to continue to trade, with individuals appointed to influential roles also needing to be approved by the FCA. Consumers will be better protected under the new FCA regime—the FCA will impose binding rules; operate a flexible and responsive regime; use its wide enforcement toolkit; and ensure consumers have access to redress.

The Government strongly welcomes the FCA’s detailed proposals for regulating consumer credit, published in a consultation paper on 3 October, including limiting rollovers to two and restricting the use of Continuous Payment Authorities (CPAs). The FCA is considering consultation responses, along with the Committee’s views and recommendations, and will publish its final rules later this month.

In addition, the Government has legislated in the Financial Services (Banking Reform) Act 2013 to require the FCA to introduce a cap on the cost of payday loans. Introducing this duty on the regulator ensures its efforts are focused to implementing the cap, rather than having to spend time and resources making the case for using its cost capping powers in the first place. The FCA will design a cap that protects consumers from unfair costs, with the cap covering all costs associated with a payday loan—not just the interest rate. The FCA has said that it will consult on the design of the cap in the summer. Final rules will be published before the end of the year, and all lenders must be compliant with the cap by 2 January 2015.


Affordability assessment

We welcome the FCA’s proposals to adopt the OFT’s affordability guidance. However, we remain concerned that payday loan companies will continue to be allowed to adopt “an affordability test suitable to their business”. While the FCA is right to concentrate on “higher-risk” firms we recommend that all payday loan companies should be required to resubmit their affordability tests to the FCA for approval before they can continue to work in the sector. (Paragraph 23)

We have empowered the FCA to make rules on how firms assess affordability. The FCA proposed in its rulebook consultation that it will transpose OFT affordability guidance—into binding rules, enforceable with the full range of FCA enforcement powers. These rules require that lenders check borrowers’ ability to repay loans sustainably.

In addition, the FCA will scrutinise at authorisation that all payday lenders have suitable and sustainable business models, including that they undertake appropriate affordability assessments.

Data sharing

It is clear that for short-term loans, a real-time database is a key tool for assessing the affordability of loans and whether individuals are applying for multiple loans. It is also possible that this greater transparency will increase competition in the sector and drive down costs for the consumer. Despite the sector’s apparent support for real-time data sharing, little progress has been made. We recommend that the FCA make clear to the sector that if real-time data-sharing has not been established by July 2014, the FCA will mandate its use as a condition of trading in the sector. (Paragraph 29)

Six-monthly activity reports from payday lenders will help the FCA assess the market and the working practices of companies. However, we believe that more up to date data is necessary for the FCA to discharge its duty of oversight. We therefore recommend that the FCA has full access to any data-sharing programme established by the sector. (Paragraph 30)

The Government believes that lenders must make proper assessments of an individual’s ability to repay before they lend, based on accurate, timely and comprehensive information on the loans an individual has outstanding.

The FCA is looking at how data is shared as a priority. This will include looking at the role of credit reference agencies and of lenders, and international examples of data sharing systems.

The FCA has already made clear to payday lenders and credit reference agencies that they must identify and remove any data sharing blockages involving payday lenders as a matter of urgency. The FCA has said that if the industry cannot overcome the obstacles, and if the FCA is best placed to bring about real-time market-wide data-sharing, it will not hesitate to act. The Government strongly endorses this message to the industry and the FCA’s commitment to act if the market does not respond quickly enough.


Rollovers and Continuous Payment Authorities (CPAs)

Payday loans should only be considered as a solution to a short-term financial shortfall. A limit of two roll-overs, while a welcome development, is not a short-term fix as it would represent a 3-month loan. Therefore, we recommend that the FCA sets a limit of one roll-over for each payday loan. (Paragraph 38)

The Government shares concerns about the mounting costs that can arise from rollovers.

In its consultation on detailed proposals for the new regime, the FCA has suggested a limit of two rollovers, but has also specifically sought views on a limit of one. The FCA is currently considering responses ahead of publication of the final rules in the coming weeks.

It is important that consumers are protected from unfair costs. The Government therefore legislated to require the FCA to introduce a cap on the cost of payday loans. The cap will cover all costs associated with the cost of a loan—including rollover costs—and will therefore limit consumers’ exposure to potential spiralling costs.

We agree with the FCA’s proposals to limit to two the use of the Continuous Payment Authority by payday lenders. We recommend that payday lenders be required to give 3 working days’ notice before using a CPA and that each notice sets out, at the start, the right of a customer to cancel the CPA. (Paragraph 51)

As does the Committee and the FCA, the Government is concerned about the behaviour of high-cost short-term lenders who have been using continuous payment authorities to gain unlimited access to consumers’ bank accounts. The Government therefore welcomes the FCA’s proposal to limit the use of CPAs. The FCA makes a number of other proposals on CPAs, including requiring lenders to make clear to consumers their rights around CPAs before entering into agreement, and to ban high-cost, short-term lenders from taking part payment using a CPA.

Advertising

We welcome the FCA’s proposals to require all payday adverts to include both a “health warning”, and directions to debt advice services. We recommend that these warnings be subject to the same requirements for prominence as APRs and that the “health warning” should be repeated at every stage of the application process. (Paragraph 64)

The Government welcomes the FCA’s proposals that all payday lending adverts should carry a risk warning and should signpost to debt advice.

Research suggests that payday lending consumers consider product features such as speed, flexibility and availability of credit to be more important than cost. As a result, providing more information about price may not be the most effective way to better inform consumers of the risks of borrowing from payday lenders, or prevent irresponsible borrowing.

The FCA have therefore proposed a risk warning that is targeted at consumers who could under-estimate the risks and costs associated with not paying back a loan on time, and those consumers that would benefit from impartial debt advice.


It is worth noting that, as the Consumer Credit Directive (CCD) is a maximum harmonisation measure, it is not open to the FCA to make certain rules over and above that prescribed by the CCD. In response to recommendations from the Public Accounts Committee last year, the UK Government raised issues around the relative prominence of different cost of credit measures with the EU Commission as part of its ongoing work to review CCD implementation.

We further recommend that the FCA include the warning that the use of payday loans could affect an individual’s credit rating for other financial products, including mortgage applications, should evidence support that position. (Paragraph 65)

It is important to note that credit risk models and approaches vary between lenders; so while a history of taking out payday loans may prevent a borrower taking out a loan with one lender, others may take a different approach.

Research undertaken by Ofcom has shown that payday loan advertising is prevalent on daytime television and children’s channels. We do not believe that these are appropriate channels for payday loans. We recommend that payday loan adverts are banned from programming aimed at children. (Paragraph 66)

Payday loan adverts are subject to the Advertising Standards Authority’s strict content rules. The ASA will not hesitate to ban irresponsible adverts, and has a strong track record of doing so, including recent Wonga and Peachy adverts.

The increase reported by Ofcom in the number of payday lending ads seen by children is concerning, but it is also important to note that they comprise a relatively small 0.6% of TV ads seen by children aged 4–15. The Broadcast Committee of Advertising Practice (BCAP), the body that writes the Broadcast Advertising Code, is considering the extent to which payday loan advertising features on children’s TV and whether there are any implications for the ASA’s regulation of this sector.

Separately, the Financial Conduct Authority has consulted on new rules for consumer credit adverts, including proposals to introduce mandatory risk warnings and signposting to debt advice. It has powers to ban misleading adverts which breach its rules.

Referrals and marketing

Anecdotal evidence from consumer groups and others has demonstrated that unsolicited marketing or brokering of payday loans through texts and emails is an increasing problem. However, there is not yet a sufficient evidence base to understand who is driving this market, which groups are being targeted and when they are sent. (Paragraph 74)

We recommend that the FCA highlights the ‘7726’ short code in all its literature on payday loans and discusses with the Information Commissioners Office how texts on payday loans could be disaggregated to establish the extent of bad practice in the sector. If this evidence base demonstrates inappropriate targeting or marketing we recommend that the FCA moves quickly to ban the brokering of payday loans through email, texts and other personal mobile devices. We also recommend that the FCA devises and issues a guidance note for payday lenders along similar lines to that established by the Claims Management Regulator in its Marketing and Advertising Guidance. (Paragraph 75)


We further recommend that the FCA conducts a holistic review of the impact of payday loan advertising, the practices of referrals companies working in the payday loan sector and their use of websites advertising payday loans. That review should inform a stricter code of practice in the advertising and marketing of short-term loans. (Paragraph 76)

The FCA has set out tough proposals regarding payday lenders’ promotions and advertisements. All advertisements and other promotions must be clear, fair and not misleading. The FCA will also require clear risk warnings to be displayed on all payday loan adverts and promotions. The FCA will be able to ban adverts that breach its rules.

As with its regulation of other financial services markets, the FCA is committed to ensuring that cold calling by phone, text or email makes clear the identity of the firm, and the purpose of the communication, so the consumer can decide whether to proceed. Such promotions will also be required to include a representative example or APR, where appropriate.

The Competition Commission is undertaking an investigation into the fundamental problems in the payday market. In its recently published ‘annotated issues statement’, it noted that:

“Spending by lenders on acquiring potential new customers through online auctions operated by lead generators is likely to remain an important focus of our investigation ... We note the possibility that lenders’ willingness to bid large amounts for leads may be indicative of the expected profitability of the customers sourced. We are continuing to consider what this tells us about profitability and competition between payday lenders and propose to explore this issue further with lenders.”

The FCA will publish its final rules for consumer credit advertising and financial promotions in the coming weeks.

Debt advice

Debt charities and consumer organisations have made clear that number of people seeking debt advice for payday loans is increasing at an alarming rate. When payday loans come under the authority of the FCA, they will be subject to a levy. This must be additional to the existing levy and not used to off-set the level of payments by other financial organisations. We recommend that the levy paid by payday lenders is ringfenced by the Money Advice Service solely for the funding of front-line debt advice services. (Paragraph 80)

The Government is committed to ensuring that payday lenders, and all consumer credit firms, pay their fair share towards the provision of debt advice and money advice. Consumer credit firms will therefore begin contributing to the Money Advice Service once they have been authorised by the FCA.

The Government agrees it is vital that consumers have access to free, impartial advice to help them manage their debts, and that payday lenders contribute to funding for debt advice. While the methodology for calculating the MAS levy for debt advice is the responsibility of MAS the Government believes that funding for debt advice should be determined principally by the predicted demand for advice and how this demand can


efficiently be met. MAS has conducted research into the likely demand and is required by statute to consult on its budget. The National Audit Office recently noted that MAS has delivered value for money in its debt advice provision and, last year, 94% of MAS’s budget for debt advice was spent on frontline delivery services.

Money advice is also important: giving borrowers the knowledge and skills that will help them to borrow responsibly, choose the best type of loan for them and stay out of debt in future. It is therefore right that the MAS levy paid by payday lenders goes towards provision of money advice as well as debt advice.

19 February 2014


Appendix 2: Response from the Financial Conduct Authority

We welcome the Business, Innovation and Skills Committee’s report on Payday Loans.

We consulted on our high-level consumer credit regime in March 2013, and published our response alongside the consultation on the detailed proposals on 6 October. The consultation on the detailed proposals closed on 6 December. Today we have published our policy statement on the detailed regime for consumer credit, ahead of regulation transferring from to the Office of Fair Trading (OFT) to the FCA on 1 April.

Today’s policy statement summarises the responses to our consultation, and sets out our final position on our proposals. The policy statement is available on our website: www.fca.org.uk/news/policy-statements/ps14-3-final-rules-for-consumer-credit-firms

We have listened to the responses from consumer groups, industry, and others who responded to the consultation. The Financial Services and Markets Act requires us to demonstrate that any new rules are proportionate through cost-benefit analysis and consultation.

While debate has naturally focussed on our proposed rules, we have also been considering how we exercise our supervisory, authorisation and enforcement powers. We have today published a guide for firms which explains how our approach to regulation is different and more proactive than the OFT’s: www.fca.org.uk/your-fca/documents/consumer-credit-being-regulated

We appreciate that public interest has been focussed on high-cost short-term credit (HCSTC) including payday lending, and this will remain an important area for us in the foreseeable future. We will also look in more detail at other regulated consumer credit activities after the transfer: we will set out our priorities in our Business Plan, which is due to be published in March 2014.

Responsible lending and credit checking

We welcome the FCA’s proposals to adopt the OFT’s affordability guidance. However, we remain concerned that payday loan companies will continue to be allowed to adopt an affordability test suitable to their business. While the FCA is right to concentrate on “higher-risk” firms we recommend that all payday loan companies should be required to resubmit their affordability test to the FCA for approval before they can continue to work in the sector. (Paragraph 23)

We are pleased that the Committee has welcomed our putting OFT affordability guidance into our rules. We agree that we need to assess firms’ affordability tests, and will do so through our authorisations work. This is in addition to the ongoing supervisory work set out below.

All firms with an OFT consumer credit licence must register with the FCA for interim permission before 1 April. This permission will allow a firm to lend legally until either the


firm’s application for authorisation has been approved, refused or withdrawn, or it does not apply for authorisation when requested to do so. During an application for authorisation we have powers to scrutinise individual firms more closely than the OFT did.

We are managing the process of making all firms with interim permission apply for authorisation by instructing firms when to apply over an 18 month period beginning October 2014. We will set out when different types of firm will have to apply for authorisation in March.

Our authorisations teams will look at every individual higher-risk firm, and assess it against the threshold conditions. As part of this, we will consider a firm’s affordability assessment. This will include both the actual procedures and the customer outcomes this has delivered to date.

Real-time data

It is clear that for short-term loans a real-time database is a key tool for assessing affordability of loans and whether individuals are applying for multiple loans. It is also possible that this greater transparency will increase competition in the sector and drive down costs for the consumer. Despite the sector’s apparent support for real-time data-sharing, little progress has been made. We recommend that the FCA make clear to the sector that if real-time data-sharing has not been established by July 2014, the FCA will mandate its use as a condition of trading in the sector. (Paragraph 29)

We agree that better data-sharing would be good for consumers. It would allow lending decisions to be based on more up-to-date information and support more effective affordability assessments; in turn this should enable lenders to make better-informed and more accurate lending decisions. This could also help borrowers who are trying to improve their credit rating by providing more up-to-date information.

We have said that this is an area of interest to us. We have also said that we would like the industry to identify and remove any blockages to real-time data-sharing as a matter of urgency. There have been a number of developments in relation to real-time data-sharing by credit reference agencies since the Committee’s report was published including announcements by Callcredit and Experian of products that for the first time update credit information daily or more than daily. We welcome any moves by the industry to overcome the technological barriers to real-time data-sharing, but we are aware that other obstacles remain.

We strongly encourage action by the industry to improve data sharing, but we are also aware that this approach has not succeeded in other areas such as SME lending. We are prioritising discussions with the industry about whether they can overcome the obstacles to effective real-time data sharing, in particular:

how to ensure the necessary participation to make this effective; and

what is a reasonable timeframe to make clear progress.

We will conclude these discussions in the summer.


If the industry cannot overcome the obstacles, and we are best placed to bring about data sharing, we will not hesitate to act.

Six-monthly activity reports from payday lenders will help the FCA assess the market and the working practices of companies. However, we believe that more up to date data is necessary for the FCA to discharge its duty of oversight. We therefore recommend that the FCA has full access to any data-sharing programme established by the sector. (Paragraph 30)

In our consultation we proposed collecting product sales data from high-cost short-term lenders. This includes information on the type, amount, term, interest rate and fees of the loan, as well as rollover information, the reason the loan was taken (if known) and some information about the customer. Following authorisation firms will have to submit this information to us every six months. This is the first time that high-cost short-term lenders will have had to report such information to a regulator on a regular basis.

Most respondents to our consultation were supportive of our proposals and agreed that they are necessary to help us effectively monitor and supervise the high-risk lending activities of high-cost short-term credit providers.

Our overall aim is to ensure that providers of consumer credit or related services have well-controlled and sustainable business models, underpinned by a culture based on doing the right thing for their customers. We currently believe we can meet our operational objectives using the supervisory tools and resources already available to us, without the need for real-time monitoring of sales data. We believe that this approach has the benefit of enabling us to dedicate resources to forward-looking supervision which seeks to identify and pre-empt emerging problems.

It may be helpful to set out some background our approach to supervision, which applies to all consumer credit firms:

Pillar 1 – Proactive firm supervision

Engaging with individual firms to assess whether they have the interests of their customers and the integrity of the market at the heart of their business. We do this by taking a forward-looking approach and using our judgement to address issues that could lead to damage to consumers or markets, with clear personal accountability for the firm’s senior management.

Pillar 2 – Event-driven, reactive supervision

When we become aware of significant risks to consumers, or when damage has already been done, we will respond swiftly and robustly.

We can identify risks or problems through a number of sources, including information from firms, data analysis, whistle-blowers, consumer complaints and referrals from partners such as local authority trading standards services and consumer groups. Firms also have a duty to tell us about any risks or problems that emerge that may have an impact on our objectives.

We will ensure firms mitigate risks, prevent further damage and address the root causes of problems. If necessary we will use our formal powers to hold a firm and individuals to


account and gain redress for those who have been treated unfairly. Occasionally we require firms to appoint a skilled person (such as a qualified independent auditor) to look into a matter for us and produce a report.

Pillar 3 – Issues and products supervision (known as thematic work)

We look at each sector as a whole to analyse current problems and investigate potential causes of poor outcomes for consumers and markets through thematic reviews. We do this on an ongoing basis, so we can address risks common to more than one firm or sector before they can cause widespread damage. These could be issues like a trend for a particular business practice, or a problem with a certain product.

Key to deciding priorities will be the potential harm to consumers in a particular activity, the number of consumers affected and how vulnerable we believe they are. Where we find a significant risk, we will establish a thematic review project to take an in-depth look at the issue in a number of firms to assess the issues, and respond appropriately. We will address our responses to the industry at large, and expect all relevant firms to consider and act as necessary on our findings. We will be announcing the subjects for our first thematic work shortly.

Rolling over of loans

Payday loans should only be considered as a solution to a short-term financial shortfall. A limit of two roll overs, while a welcome development, is not a short-term fix as it would represent a 3-month loan. Therefore we recommend that the FCA sets a limit of one roll over for each payday loan. (Paragraph 38)

We are pleased that the Committee welcomes limiting rollovers, however following our consultation we have maintained the proposed limit of two rollovers. In addition, we are introducing a requirement that a loan should not be refinanced unless the firm reasonably believes that it is not against the customer’s best interests to do so. This provides the appropriate degree of consumer protection whilst enabling firms and customers to respond flexibly where the customer is unable to repay as a result of unanticipated circumstances.

It is clear to us from the responses to the consultation that there is a consensus that some sort of restriction on rollovers is necessary, but there is a debate centring on how many should be allowed. We understand the concerns raised by consumer groups about the impact of rollovers on consumers, and in particular the negative effect on consumers of loans that were not affordable at the start being rolled over numerous times.

We also recognise that there is a need for some flexibility for consumers to rollover their loans if they are unable to repay on time as a result of unexpected circumstances, such as being paid late. However, it is clear to us that the benefits of this flexibility diminish rapidly and the cost to the consumer increases sharply. Repeated rollovers can exacerbate financial difficulties. If a customer has run into unforeseen financial difficulty which prevents repayment even after a rollover then the best way to address it is forbearance and the agreement of an affordable repayment plan, not extending the loan and increasing the debt.


Our rules dictate that firms should treat customers fairly if they default or require forbearance. This will be an area of significant interest to us in the future.

Continuous Payment Authorities

We agree with the FCA’s proposals to limit to two the use of Continuous Payment Authority by payday lenders. We recommend that payday lenders be required only to give three working days’ notice before using a CPA and that each notice sets out at the start, the right of a customer to cancel the CPA. (Paragraph 51)

We welcome the Committee’s support for limiting the use of Continuous Payment Authorities (CPA). The Committee may note that, in response to feedback, we have clarified our rules about how CPAs should operate. We have addressed concerns about the impact on instalment loans, and allowed consumers to ‘re-set’ the CPA when a loan is rolled over. We have maintained our overall approach, limiting CPA to two attempts and banning lenders from automatically taking part payment, which together will stop firms repeatedly accessing a customer’s bank account as some have in the past.

Several consumer groups argued that CPA should not be used unless a consumer is warned in advance. Several firms highlighted that the Consumer Finance Association Lending Code requires their members to inform the customer three days before attempting repayment about the use of CPA and encourages the customer to contact the firm if the customer is in financial difficulties and cannot make the payment.

In October we did not consult on introducing a requirement for firms to inform consumers before they use a CPA, although we can see that there are potential benefits to consumers. We will consider consulting on such a rule after the transfer of regulation.

Firms are required to explain how they will use a CPA, and that a consumer can cancel it, in the pre-contractual information they supply to the consumer.

Advertising

We welcome the FCA’s proposals to require all payday adverts to include both a “risk warning” and directions to debt advice services. We recommend that these warnings be subject to the same requirements for prominence as APRs and that the “risk warning” should be repeated at every stage of the application process. (Paragraph 64)

We welcome the Committee’s support for a warning on high-cost short-term credit adverts. The Committee should note that, in the light of feedback that the warning should be shorter and sharper, we have worked with the advertising and standards authority and modified it so that it now reads:

“Warning: Late repayment can cause you serious money problems. For help, go to www.moneyadviceservice.org.uk”

We have stated that firms must display the warning in a prominent way. We have decided not to give any further guidance on how the risk warning should be displayed. We expect firms to reflect how to make the advertisement work in line with our principles and in accordance with established processes in each medium; for example for television there are


rules around how to ensure a risk warning works – in the Broadcast Committee of Advertising Practice guidance. We are able to take enforcement action against firms that do not display the warning prominently. Firms must use the warning on online and email adverts from 1 April, and on other adverts from 1 July.

We further recommend that the FCA include the warning that the use of payday loans could affect an individual’s credit rating for other financial products, including mortgage applications, should evidence support that position. (Paragraph 65)

In general, the feedback on our risk warning was that a shorter, sharper warning will be more effective. Therefore we do not feel it is appropriate to include additional information in the warning. There is evidence to suggest the more information you put in a warning of this nature the less a consumer takes out of the message.

We want mortgage lenders to properly assess affordability, and for people to take out mortgages they can afford to repay. For mortgages that we regulate, we set the framework for lenders but do not set the individual lending criteria that they use when assessing affordability and creditworthiness, such as whether or how they should consider payday loans. Instead, firms make their own commercial decisions around their lending criteria.

The approach taken will vary between lenders, according to their own individual assessment of risk. Consumers who cannot get a mortgage with a particular lender for any reason may find it helpful to discuss their circumstances with different providers, or using a mortgage intermediary to identify lenders who may be willing to consider their application.

Research undertaken by Ofcom has shown that payday loan adverting is prevalent on daytime television and children’s channels. We do not believe that these are appropriate channels for payday loans. We recommend that payday loan adverts are banned from programming aimed at children. (Paragraph 66)

We are not best placed to ban advertising on children’s or daytime television.

Any ban on adverts for high-cost short-term credit would need to comply with Article 10 of the European Convention on Human Rights which extends to commercial advertising by firms. Article 10 sets out the right to freedom of expression.

The article states that any restriction would need to be prescribed by law, necessary in a democratic society so that it is proportionate, and in pursuit of national security, territorial integrity or public safety, prevention of disorder or crime, the protection of health or morals, protection of the reputation or rights of others, prevention of the disclosure of information received in confidence, or maintaining the authority and impartiality of the judiciary.

Our financial promotions supervision team will be focused on using the powers and resources available to us to ensure that adverts are clear, fair and not misleading. All Consumer Credit firms will have to comply with our rules on financial promotions.


Referrals and marketing

Anecdotal evidence from consumer groups and others has demonstrated that unsolicited marketing or brokering of payday loans through texts and emails is an increasing problem. However, there is not yet a sufficient evidence base to understand who is driving this market or which groups are being targeted and when they are sent. (Paragraph 74)

We recommend that the FCA highlights the ‘7726’ short code in all its literature on payday loans and discusses with the ICO how text on payday loans could be disaggregated to establish the extent of bad practice in the sector. If this evidence base demonstrates inappropriate targeting or marketing we recommend that the FCA moves quickly to ban the brokering of payday loans through email, texts and other personal mobile devices. We also recommend that the FCA devises and issues a guidance note for payday lenders along similar lines to that established by the Claims Management Regulator in its Marketing and Advertising Guidance. (Paragraph 75)

We further recommend that the FCA conducts a holistic review of the impact of payday loan advertising, the practices of referrals companies working in the payday loan sector, and their use of websites advertising payday loans. That review should inform a stricter code of practice in the advertising and marketing of short-term loans. (Paragraph 76)

We agree that this is an area that needs careful consideration, and will be looking at regulated firms’ financial promotions from 1 April. This includes lenders and credit brokers.

We understand that the Committee has concerns about the suitability of some advertising for high-cost short-term credit. We have powers to ensure that adverts are clear, fair and not misleading, and all consumer credit firms will have to abide by our rules on financial promotions. For television, this is in addition to the Broadcast Committee of Advertising Practice guidance.

Our requirements on financial promotions—which apply across all media—comprise both rules and associated guidance. We keep the effectiveness of our rules and guidance under review, and look to amend or update these when we see the need. We will outline our wider approach to promotions in text messages, social media, and other digital media before the summer.

The Committee will be aware that brokering credit is a regulated activity. Our rules therefore extend to credit brokers as well as lenders, and there are specific requirements in relation to how firms market products or services, including the use of unsolicited calls or texts.

We will monitor digital, broadcast and print financial promotions from 1 April, to ensure that they comply with our rules. Where we see a non-compliant promotion, we will contact the firm, asking them to amend or withdraw it. For repeat breaches, we may also ask them to provide us with a signed statement that they have effective governance in place for the approval of compliant financial promotions. In cases where the firm does not co-operate, we can issue a supervisory notice banning the promotion. In the worst cases, enforcement action may also be appropriate.


In addition, as part of assessing whether or not we should authorise a firm, we will look at their advertising and sales process. This includes making sure that firms’ promotions meet our requirements and that they do not unfairly market products or services to vulnerable consumers. All advertising must be clear, fair and not misleading.

We understand that some firms use lead generators. Where lead generators effect introductions to lenders or brokers or act as credit intermediaries they will be regulated as credit brokers. We expect lenders and brokers to take reasonable steps to ensure that all persons acting on their behalf comply fully with the law and our rules.

We will require that regulated firms using lead generators have additional controls to ensure that they provide products and services that are in the customer's best interest and that they exercise appropriate influence over the firms they work with. Regulated firms must comply with data protection and Telephone and Mail Preference Service requirements.

We are giving further consideration to our relationship with the ICO and whether the mobile phone network’s ‘spam text’ short-codes can provide intelligence that is useful to us. In the meantime, we ask that consumers who want to report a misleading financial advert or promotion for any regulated firm contact our consumer helpline on 0800 111 6768 or email [email protected].

During oral evidence the Committee expressed concern that some credit brokers may be referring consumers to unauthorised money lenders: this would be a clear breach of our rules and we will take swift action if we find any examples of this behaviour.

Debt Advice

Debt charities and consumer organisations have made clear that the number of people seeking debt advice for payday loans is increasing at an alarming rate. When payday loans come under the authority of the FCA, they will be subject to a levy. This must be additional the existing levy and not used to off-set the level of payments other financial organisations. We recommend that the levy paid by payday lenders is ring-fenced by MAS solely for the funding of front-line debt advice services. (Paragraph 80)

The budget for debt advice is put together by the Money Advice Service (MAS), which the FCA Board must then approve. We collect the MAS’ levies alongside the FCA levy, which pays for the cost of regulating firms, and the Financial Ombudsman Service (FOS) levy, which pays for individual complaint resolution.

Consumer credit firms will start paying the MAS, FCA and FOS levies once they are fully authorised. They will not pay anything whilst they still have interim permission.

All consumer credit firms, including high-cost short-term lenders, will contribute to both the MAS’ debt advice and money advice levies.

However, MAS’ budget for debt advice will be based on what resources it needs to fund its partners to deliver debt advice to help meet demand. The MAS have been surveying the supply of, and demand for, debt advice which will inform the activities of their debt advice


partners in the year ahead. If, after its budget has been agreed, MAS notify us that they require additional funding we would be happy to consider this.

28 February 2014

Documents

House of Commons Committee · Payday Loans: Responses to the Committee’s 7th Report of Session 2013-14 5 Rollovers and Continuous Payment Authorities (CPAs) Payday loans should