Understanding the payday loan code of conduct
The growing payday loan market recently received a new code of conduct at the end of 2012, supposedly providing the UK payday loan industry with the regulation it desperately needs. The new code of conduct was created in an attempt to add transparency to the payday loan process and protect vulnerable individuals from unscrupulous payday lenders.
The new code of conduct, called the Good Practice Customer Charter, was formed by the four largest trade bodies, which represent approximately 100 short-term and payday loan companies. Unfortunately, despite the formation of these trade associations and continual government warnings stating that payday lenders need to clean up their act, the payday loan code of conduct has been heavily criticised and does not yet seem like anything groundbreaking.
Payday loans in the UK
Similar to payday loans in other countries, UK payday loans are simply short-term loans designed for individuals who need to borrow a small amount of money to pay for an emergency or hold them over until they receive their next pay cheque. Many have proven helpful, but these companies are routinely criticised for their aggressive marketing tactics and exorbitant interest rates. Although there are cheaper ways to borrow much needed money, the rapid spread of payday loan lenders has almost completely taken over the short-term loan market.
Inside the payday loan code of conduct
Each member of the UK’s four trade associations: the Consumer Credit Trade Association, Consumer Finance Association, Finance & Leasing Association, and the BCCA, has agreed to follow a new code of conduct. This universal code of conduct dictates that each payday lender must:
- Act responsibly, reasonably, and fairly without pressuring consumers into entering loan agreements
- Not tell consumers that payday loans are sound long-term financial strategies
- Clearly explain how payday loans work and disclose all of the charges while ensuring that the the loan is suitable for every customer
- Perform proper checks prior to issuing a loan and disclose what information will be checked to every consumer before accepting a loan request
- Notify customers by phone, text, letter, or email at least three days prior to the commencement of payments
- Freeze interest charges if a consumer experiences problems while in a repayment plan or after two months of non-payment
- Provide valuable information about the Consumer Credit Counselling Service and other free debt advice organisations
The real effect of the payday loan code of conduct
Although the enforcement of a payday loan code of conduct is a positive step in the regulation of the often unscrupulous payday loan industry, the code of conduct adopted by the four overseeing trade associations does not extend above and beyond current regulations and does not address the growing problem of payday loan debt.
One in 20 unemployed UK residents who spoke to the CCCS in 2012 suffered from payday loan debt, which has caused the helpful charity to admonish the code by insisting that it is reliant on self-regulation and not tough enough to detract unscrupulous payday loan tactics.
While the code of conduct is a valiant attempt at regulating the payday loan industry, it does not have the ability to immediately shut down the operations of a rogue payday lender. Today, payday lenders caught breaking the rules are simply warned before being removed from the BCCA, Consumer Finance Association, Consumer Credit Trade Association, or the Finance & Leasing Association. The rising number of payday lenders also has many worried that new lenders will simply choose to operate outside of these associations without suffering any repercussions.
What to do if a lender does not comply with the code of conduct
If an individual finds that a lender within one of the associations has broken the charter rules, they should contact the association and possibly have the lender removed from the charter or contact the Financial Ombudsman Service to file a complaint and have the lender investigated.
Further payday loan regulation
Separate plans are currently working their way through Parliament, both of which would hand over power to shutdown rogue payday lenders to the Office of Fair Trade. At the moment, the OFT is conducting a formal review of the fast-growing payday loan market. Only time will tell if further payday loan regulation will ensue.
