Today I am making two key consumer credit announcements.
First, I am publishing the Bristol University report on the impact of a cap on the total cost of credit and our Government response to that report.
Secondly, together with the Economic Secretary to the Treasury, I am also publishing the Government consultation on the planned transfer of consumer credit regulation to the Financial Conduct Authority (FCA) from April 2014.
This Government have a clear vision for the consumer credit market: we want to see firms meeting high standards, lending responsibly, and offering competitively designed and priced products that meet consumers’ needs. We want to see consumers borrowing sensibly, able to exercise choice and having confidence in the system, secure in the knowledge that they can expect to be treated fairly by firms and that, if things do go wrong, the regulator will step in swiftly and decisively to put it right.
But the consumer credit market today is not functioning well. The National Audit Office recently estimated that there was £450 million of unaddressed consumer detriment in the market last year and concluded that the current regulatory regime under the Office of Fair Trading lacks the capacity and powers to tackle consumer detriment effectively.
There are particular problem sectors. The Bristol report, and the OFT’s final report on payday compliance, also being published today, clearly set out that the high-cost credit market, and most particularly the payday lending market, is not functioning well in consumers’ interests. Too many firms are not complying with the legislation and guidance in place. There are concerns that the business model of the payday industry itself may be flawed and competition may not be working effectively. As a result, consumers are suffering serious detriment. Both reports have identified clear evidence of problems in the way in which lenders advertise and market their payday loans to consumers, provide the loans to consumers and manage their relationship with customers once they have a loan.
The Government are deeply concerned about the evidence and scale of consumer detriment identified and the evidence of widespread non-compliance by payday lenders.
Our announcement today that we plan to transfer the regulation of consumer credit to the FCA in April 2014 is part of the solution to make sure that the consumer credit market functions better for consumers and for lenders. The transfer will, for the first time, bring conduct of business regulation under a single financial services regulator. This will end confusion for consumers, remove unnecessary duplication for many firms, and create a single strategic regulatory view across retail financial services. The FCA will have tough, responsive and dynamic powers to tackle emerging problems in credit markets quickly and effectively from April 2014.
While the Government are confident that the new regulatory regime that will be in place from April 2014 will deliver better outcomes for consumers in the medium and long-term, it is vital that consumers are adequately protected through the period leading up to the transfer. The evidence from the Bristol report and the OFT final report on payday lending demonstrate that urgent intervention is required in the high-cost credit market, in particular in the payday lending sector. That is why we have set out in our Government response to the Bristol report how we intend to work with the current and future consumer credit regulators to ensure a strong and co-ordinated response to the problems identified, now as well as from April 2014.
Today I am announcing that:
The OFT will clamp down now on irresponsible practices and in some cases blatant non-compliance by payday lenders;
The OFT is consulting on a provisional decision to refer the payday lending market to the Competition Commission;
The Government will begin immediate work with industry and regulators to clamp down on advertising of payday loans;
The Government are strongly pressing for the industry to improve compliance with payday lending codes and to put in place new provisions within the codes in specific areas of concern, notably continuous payment authority; and
The FSA has committed to prioritise action on payday lending as soon as it takes on the regulatory responsibility in April 2014. During the rest of this year, it will consider whether there are gaps in the regulation of payday lending that need to be addressed by the FCA from April 2014 and will turn existing OFT guidance into rules that are binding on firms.
I am not announcing a cap on the total cost of credit. The Government asked Bristol University to consider the impact of such a cap. This Government’s view is that a cap would not be the best solution now to the problems that have been identified by the Bristol report and the OFT payday compliance review. The Bristol report’s findings indicate that such a cap could reduce access to credit, reduce the supply of credit and weaken competition. It could also lead lenders to shift more to charges which fall outside the cap and to optional fees which are generally less transparent to consumers. However, the Government recognise that a cap might be appropriate at some point in the future. This is why we have provided the FCA with specific powers to impose a cap on the cost and duration of credit, should they deem it appropriate once they take over the responsibility for consumer credit in April 2014.
This Government believe that tough enforcement and compliance action today, combined with a move to a new consumer credit regulatory regime that is equipped to deliver more robust consumer protection in the future, will do much to address the key concerns in this market. It will weed out rogue lenders, ensure that consumers have tools to make the right borrowing decisions for them, and provide important protection and help for consumers who find themselves in difficulty.