On Monday, British Parliament began debating whether to empower regulators to cap costs for high-priced borrowing including payday loans. Stella Creasy, Walthamstow MP, tabled a Financial Services Bill amendment designed to better protect consumers. She has been outspoken regarding practices that she refers to as “legal loan sharking.”
Other Labor MPs backed the amendment, three of them formally signing it, heading into the vote.
Bank regulation reform is one of the other measures included in the bill, which calls for formation of a Financial Conduct Authority (FCA), designed to replace the Financial Services Authority. The FCA would assume consumer credit regulation responsibility from the Office of Fair Trading (OFT).
Part of its duties would involve preventing the misselling of poor financial products to British consumers. The amendment proposed by Ms. Creasy would permit the new financial regulator to impose a maximum amount that lenders may charge for credit.
The limit would not pertain to the loans APR but to the total borrowing charges represented by combining interest and arrangement fees. The amendment would also permit the regulator to impose a maximum duration for a credit service or product to any single consumer.
The OFT is currently permitted to sanction lenders that breach provisions of their consumer credit license. However, license removal can take years and Ms. Creasy does not believe that current fines deter unacceptable practices.
How many MPs would vote in favor of the bill was unknown prior to the vote. Ms. Creasy noted that many Tory MPs were frustrated that their party had not proposed an alternative. She also commented that with the government not considering any solutions, more Brits were getting into trouble with payday loans.
Her proposed amendment is designed as a beginning to increased regulation for the industry.
The credit crunch has led many people to find alternatives to loans bank provided. Online and brick-and-mortar companies offering no credit check loans represent some of these. Consumers can even use a mobile phone to apply for payday loans. They may not be the loans cheapest around but they are much easier for people to get.
The money is intended for short-term borrowing and the financing is relatively harmless when used in this manner.
What Ms. Creasy takes issue with is the high loans APR that make it easy for borrowers to amass debt when they fall behind on loan payments. The MP stated that the UK does not strictly monitor companies within this industry. She would like to eventually see an overall cost cap for this borrowing, similar to what exists in other European countries.
Her current amendment does not impose such a cap but instead empowers the regular to do so.
Ms. Creasy spoke in support of the Financial Services Bill and her amendment on Monday. She stated that establishment of the FCA would allow the government to quickly take action to prevent the issue from worsening. She also called on the government to invest more in financial education and credit advocacy services as well as increase sources of affordable credit.