The regulator’s 191-page consultation paper, CP13/10 Detailed Proposals for the FCA Regime for Consumer Credit, focuses on how it will scrutinise the sector but stopped shy of putting a cap on the rates of interest charged by payday lenders.
The FCA, which will take over responsibility for more than 50,000 firms with existing credit licences from the Office of Fair Trading in April 2014, has proposed that it will enforce a mandatory affordabilty check on borrowers, limit to two the number of loan rollovers and restrict the number of times a continuous payment authority can be used to twice.
There will also be tighter restrictions on the wording of advertisements for payday lenders and the FCA will be able to ban any that are misleading.
Mr Wheatley said: “We believe that payday lending has a place, but today I’m putting payday lenders on notice. Tougher regulation is coming and I expect them all to make changes so that consumers get a fair outcome. The clock is ticking.”
Key points from the FCA’s consultation paper |
Firms must register for interim permission. If they do not they must stop carrying out activities by March 2014. There will be additional disclosure requirements for firms relating to their registration. The peer-to-peer industry will be regulated by the FCA and there will be new regulated activity on operating an electronic system for lending. Recognition of different spectrums of risk in the consumer lending market – a formal classification system for firms registered with the FCA. Additional reporting requirements for firms registered with the FCA. Powers to review financial promotions issued by firms in the industry. All promotions must be “clear, fair and not misleading” and comply with existing rules on advertising. Introduction of more detailed conduct of business rules for firms engaging in the consumer lending market. Introduction of a new warning concept for high-risk products. Specific rules on high-cost, short-term lending, including payday lending with limitations on rolling over loans. Prudential rules for debt management firms and certain not-for-profit vehicles. Expand the types of firms who will be subject to the Financial Ombudsman Service. The FCA take enforcement action if there is potential breach of the rules |
A new rule book, the Consumer Credit Sourcebook, will be published with information on the FCA’s regime. The regulator will include existing OFT standards.
Reaction round-up
Monica Gogna, partner of the financial regulation team for law firm Pinsent Masons, said: “Intervention and a more hands-on approach will be the FCA’s mantra in order to fulfil its remit to protect the consumer. While there is a lot of talk of regulation for payday lenders, it is also positive to see there is a more formal recognition for the peer-to-peer industry, which has provided a breath of fresh air in the traditional consumer lending industry.”
Andre Spicer, professor of organisational behaviour for Cass Business School, said: “These regulations only get to first base and do not address the usurious rates of interest charged. Nor do they ask whether the industry should exist at all. This is surprising because Australia and other European countries have put a cap on interest rates.”
Chris Budd, managing director of Bristol-based Ovation Finance, said: “The regulation is long overdue and, of course, welcome. Payday lenders are not all terrible. The small focus on annualised percentage rates is not helpful as the calculations on short-term loans are misleading but I applaud the FCA for focussing on the areas that it has.”
What Next?
The consultation is open until 3 December and the FCA will publish its final rules and guidance in February 2014. A separate consultation on crowd funding, including aspects of peer-to-peer lending, will be published in October.
