A former lawyer at the Financial Ombudsman Service has warned online payday loans may end up following the route of PPI and becoming another mis-selling scandal.
James Ward believes online payday lenders are leaving themselves open to future legal problems because of their promise of instant decisions and money transfers.
He told the Independent:
“If it transpires that payday lenders haven’t acted ethically or provided adequate information to borrowers, a deluge of complaints may follow,” he warned. “The legislation that regulates this area is simply not adequate.”
“There is no time to assess whether they should be lending to the borrower at all and this is virtually impossible without a face to face transaction. A vulnerable consumer, desperate for some quick cash will simply tick whatever boxes they need to get it without reading the small print. It is highly doubtful that they will understand the terms of the loan.” Source
A similar argument was recently used in Scotland where the law states a witness must be present for certain contracts. Some MSP’s were hoping to use it as a back door route to banning online payday lenders.
Mr Ward claims the Government should ban payday loan lenders from operating online or at least enforce a 7 day period between the application and the borrower receiving the money which kind of defeats the whole idea of emergency cash loans but then I suspect Mr Ward knows that full well. He also wants to restrict the number of times a loan can be rolled over to prevent the loan from escalating.
Personally I don’t see the difference between answering questions via an online form, on the telephone or walking into a high street money shop. All can be lied to should you be that way inclined and all are able to pay out the loan instantly. If anything, I would expect the online application to be harder to defraud as the credit check is an automated process where as the other methods are open to human error.
Having looked at the various legislations imposed in other parts of the world, the following would be our recommendations for the UK payday industry.
- Scrap the law insisting payday lenders must display their APR and instead show it as a charges per £100
- Cap the charges to a maximum of £25 per £100 borrowed per month
- Restrict continuous payment authority to 1 payment
- Restrict the number of times a loan can be rolled over to 1
- Allow 1 business day cooling off period where the borrower can return the money without charge if they have a change of heart
If the Consumer Finance Association – the trade association representing the interests of online payday lenders – were to implement the above it would certainly preempt any further calls to ban payday loans. Consumer Affairs Minister Ed Davey has already dropped a big hint that he is considering stopping continuous payment authority so why not beat him to it?
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