New code of conduct for payday loan lenders

The payday loan industry is getting a new code of conduct, but is it worth the paper it's written on?

A new code of conduct has been created for the payday loan industry in an attempt to both make the process of taking out a short-term loan more transparent and to protect vulnerable customers.

It’s called the Good Practice Customer Charter and has been formed by four trade bodies, who together represent 100 payday and short-term loan companies. If a lender is found to be breaking the rules of the charter it will be told to change its practices and may face expulsion from the association.

However, despite continual warnings from the Government that this industry must clean up its act and stamp our rogue operators, on paper the code doesn’t look like anything new and it's been heavily criticised by consumer groups. 

Payday loans

Payday loans work on a short-term basis and are aimed at people who need to borrow a small amount of cash until they get their next pay cheque. However, these companies have been criticised repeatedly for their aggressive tactics and sky-high interest rates and there are many other, cheaper ways to borrow money,; we've listed them in this article on the top alternatives.

The code

Members of the four trade bodies – the Consumer Finance Association, the Consumer Credit Trade Association, the BCCA and the Finance & Leasing Association – have agreed to follow the new code from 26th November, which says they must:

• Act fairly, reasonably and responsibly without putting pressure on customers to enter loan agreements
• Not tell customers that the loan is good for long-term financial needs
• Explain clearly how the loan works, including all charges, and check it’s suitable for the customer
• Carry out proper checks before issuing a loan and tell the customer what information will be checked before a loan request is accepted
• Notify a customer by email, text, letter or phone at least three days before repayments commence
• Freeze interest and charges if a customer is having problems and is in a repayment plan or after a maximum of 60 days of non-payment
• Give information about free and independent debt advice organisations such as the Consumer Credit Counselling Service (CCCS)

Is it any use?

While it’s good something is happening, the code doesn’t really go above and beyond anything that currently exists and doesn’t address the problem of people getting into debt with these lenders.

One in 20 unemployed people who spoke to CCCS last year had pre-existing payday loan debts and the charity says a code which relies on self-regulation is not stringent enough. This is because there is still no way to immediately shut down rogue payday loan operators and those breaking the rules of the code will simply be warned, and then possibly removed from an association. There are also concerns that as payday loan lenders are springing up all the time, many new businesses won't join one of these trade bodies and will operate outside the code.

Further regulation

Separate plans are making their way through Parliament at the moment which would give the Office of Fair Trading (OFT) the power to instantly stop rogue businesses in this and other sectors and the OFT is also conducting a review into this market.

Do you think the code goes far enough? What would you add if you were helping create it? Leave your suggestions in the Comment box below.

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