The Financing and Leasing Association (FLA) announced an updated code of lending practices for payday loan companies.
However, consumer rights groups noted that these new rules will not likely provide increased protection to consumers during the short-term.
Critics feel that additional action must be taken to prevent UK consumers from getting themselves into more debt. Payday lenders would rather make changes voluntarily than face additional regulation.
Under the new code of practice, a payday loan may only be rolled over three times. Wonga is the only member of the FLA offering payday loans and Labor MP Stella Creasy does not think that limiting its rollovers will be helpful to consumers.
She points to America as an example of the result, where consumers repay a loan and immediately take another one. Ms. Creasy believes that a rollover limit will only work if a waiting period is imposed before a new loan can be taken.
The Labor MP is pushing for capping the total cost of these short-term, no credit check loans. A spokesperson for the Consumer Credit Counseling Service said the debt advice charity would like rollovers to be prohibited.
Money Shop owner Dollar Financial has agreed to this in Canada but still permits rollovers within the UK, the spokesperson reported.
Payday lenders have faced widespread criticism for practices including high loans APR and using debt collectors when a customer defaults.
The FLA wants its payday lender members to outline the cost of loans more clearly prior to application. It also wants lenders to reinforce the idea that payday loans are intended only for short-term borrowing.
FLA consumer finance head Fiona Hoyle said the three-rollover maximum that is part of its new practice code will only be permitted upon customer request and following a credit review.
This month, an industry review is expected to be announced by the Office of Fair Trading. According to Ms. Creasy, payday lenders are currently taking action to illustrate that additional regulation of their industry is not required.
Nearly three-quarters of the payday lending market is represented by the Consumer Finance Association (CFA), which is reportedly collaborating with other trade associations and the Department for Business Innovation and Skills to develop an “enhanced code.” This framework is anticipated to go into effect later this year.
CFA chief executive John Lamidey believes that a rollover cap on payday loans could negatively affect customers. When borrowers reach their rollover limit, they may look for credit elsewhere.
Mr. Lamidey commented that while the FLA code was comprehensive, it regulates just one lender. The code released by the CFA will pertain to many of the largest UK payday lenders, affecting more consumers.
Dan McDonald, the Medway Citizens Advice Bureau chief executive, thinks that emergencies are the only reasons to use payday loans.
He does not believe this type of no credit check payday loan financing should ever be rolled over and placing a limit on rollovers will not make any positive difference.
In his words, “it just means people can be taken advantage of three times instead of six or seven.”