Trade body the Consumer Finance Association (CFA) has launched a new code of practice aimed at increasing transparency and protecting the consumer when taking out payday loans.
This code of practice has been launched in an attempt to stem the flow of criticism and contain the threat of legal action regarding the unscrupulous practices of some payday lenders.
So what is contained within the code of practice?
- give clear information about how a pay day or short-term loan works and an example of the price for each £100 borrowed, including fees and charges;
- not pressurise customers to take out a loan or extend (roll over) the term of an existing loan agreement;
- carry out a sound, proper and appropriate affordability assessment and credit vetting to check that customers can afford the loan;
- set out clearly how continuous payment authority works and the customer’s rights to cancel this authority, so they can decide if this type of repayment is acceptable to them;
- notify customers at least three days in advance of recovering payments through a continuous payment authority;
- freeze interest and charges if a customer is in financial difficulty and making payments under a repayment plan, or after a maximum of 60 days of non-payment.
This code of practice is good news then?
Well any attempt to control this area of credit lending is welcome but consumer bodies are unanimous in their criticism of many elements of the code of practice as summarised below.
- adoption is voluntary with no enforcement details announced
- the code is too basic and is really a rebranding of existing guidelines that have been flouted by unscrupulous lenders for years
- this issues of extortionate fees and high default charges have not been addressed
- no monitoring or compliance processes have been put in place
- no details regarding affordability and credit checks and whether these will be standardised across the industry
Critics of payday loans have always cited the extortionate fees and interest rates, together with the industry's failure to ensure customers fully understand the details of the loan they are agreeing. This code of practice does nothing to address these criticisms and with no compulsory adoption or sanctions they are probably not worth the paper they are written on.