Add health warnings, rate caps and ban ads on children’s TV: MPs call for sweeping payday loan overhaul

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Add health warnings, cap rates and ban ads on children’s TV: MPs call for sweeping payday loan overhaul

  • MPs say 1.2 million families will depend on payday loans to pay for Christmas
  • The committee calls for a limitation of CPAs and rotations
  • MPs urge lenders to share data with each other

All payday announcements should include a “health warning” reminding potential clients that failure to repay loans can lead to serious money problems, MPs urged.

The Business, Innovation and Skills (BIS) committee said a warning should be repeated at every step of the application process – as well as instructions to debt counseling services.

The appeal comes as a Commons committee said up to 1.2 million families will rely on expensive loans to get through Christmas.

Support: Lenders should pay a fee to fund debt counseling for distressed borrowers, MPs say

MPs’ recommendations also included banning advertising on children’s television, tackling unwelcome emails and texts to people “at the bottom” with expensive loan offers and the obligation for lenders to. contribute cash to debt counseling.

MEP Adrian Bailey, Chairman of the Business, Innovation and Skills Committee (BIS), warned parents against using payday loans, regardless of the pressure to give children what they want .

A recent study by broadcasting regulator Ofcom found an explosion in the number of television commercials on payday loans since 2008.

Mr Bailey said: “The number of payday loan listings seen by 4-15 year olds has increased from three million in 2008 to 596 million in 2012. This means that last year the average child was exposed to 70 payday loan ads.

“It is concerning that our children are so exposed to advertisements that can present payday loans as a fun, easy and appropriate way to access finance.

Loan repayment

Find out what the monthly loan payments would be and the total cost over its lifetime, where interest is charged monthly.

“Children’s programs are just not an acceptable place to advertise payday loans.

MPs also proposed that another warning be issued to potential payday clients, indicating that the use of payday loans could affect an individual’s credit rating for other financial products, including loan applications. mortgage. However, they said the warning should only be added if there is evidence to support this position.

The rapid expansion of breakdown businesses and the growing number of appeals for help from indebted people to charities are “not unrelated,” Bailey added.

The committee has called for a tax paid by breakdown companies, under regulatory requirements, to be limited by the Money Advice Service. This money could be used to boost the provision of debt counseling to distressed borrowers.

Payday lenders have come under heavy criticism this year. The Office of Fair Trading (OFT) has uncovered deep-rooted issues, including some companies appearing to base their business practices on people who cannot afford to pay off their loans on time, which means the upfront cost of loan balloons. and they get trapped with it. lender.

Many lenders have since left the market, and others have changed their practices in line with the OFT’s recommendations.

The OFT has also referred the industry to the Competition Commission which will report next year.

Next year, the oversight of breakdown companies will shift from OFT to a tough new regulator, the Financial Conduct Authority (FCA), which has already drawn up plans to crack down on the industry.

The FCA’s plans include limiting the number of times payday lenders are allowed to roll over loans twice, and limiting to two the number of attempts lenders can make to get money back if it doesn’t. there is not enough money in a borrower’s bank account.

Concerned: MP Adrian Bailey said children's programs are not an acceptable place for payday loan announcements

Concerned: MP Adrian Bailey said children’s programs are not an acceptable place for payday loan announcements

Meanwhile, the government announced last month its intention to cap the total cost of a payday loan.

The committee supported the majority of the FCA and government proposals.

However, he said that while limiting the number of renewals to twice would be a “welcome development,” it would still mean that a loan that had to be paid off after one month could last up to three months.

He said, “Therefore, we recommend that the FCA set a limit of one rollover for each payday loan.”

But Mr Lender’s founder and chief executive, Adam Freeman, told This is Money that limiting the number of attempts to repay debts on customer accounts under the continuous payment authority to two would be detrimental to the business. ‘borrower.

“The FCA is right to make the CPA more transparent and limit the number of attempts, but by limiting itself to just 2, they actually cause a lot more grief, cost and detrimental effects to the borrower,” he said. he warned.

“If the lender is not able to get payment from the borrower, then that person will become a defaulter, which can affect their future creditworthiness. It can also cost them more money to pay late fees that some lenders add for non-payment. If the FCA prevents lenders from raising funds, it can also force a number of lenders to close their doors ”.

Famous trio: Wonga said he does not advertise on children's channels or television programs

Famous trio: Wonga said he does not advertise on children’s channels or television programs

MEPs also called for better sharing of up-to-date information between payday companies, so they can prevent distressed borrowers from getting into further trouble by taking out multiple loans from different lenders.

If payday lenders don’t work out better ways to quickly share this information by next July, the FCA should impose it as a condition of negotiations in the industry, the committee said.

Peter Tutton, Policy Manager at StepChange Debt Charity, welcomed the call, saying: “Ensuring that businesses share real-time data will help prevent the use of multiple payday loans and the downward spiral. the debt that may result. “

Russell Hamblin-Boone, CEO of the Consumer Finance Association, whose members include The Money Shop, Quick Quid and Cash Converters, said the organization acknowledged concerns about the advertising of short-term loans on children’s television channels over a year ago, “and as a result there has been no publicity by members on children’s channels since then “.

He said: “It is important to note that just viewing an ad does not constitute loan approval. CFA members conduct rigorous affordability assessments and work with referral agencies. credit before lending to anyone. ‘

Wonga, one of Britain’s foremost payday lenders, is well known for his TV commercials featuring a trio of elderly puppet characters named Betty, Joyce and Earl who explain the process of taking out a short term cash loan to viewers.

But a spokeswoman for Wonga said, “The idea of ​​Wonga advertising on children’s channels or television programs is a myth. We have a strict and long-standing policy of not advertising in this manner.

The estimated size of the payday lending industry has doubled over a five-year period to around £ 2.2 billion.

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