How to regulate payday lending: learning from international best practice

The Centre for Responsible Credit has taken a keen interest in the development of the UK’s regulatory approach to payday lending over the past year. In October 2010, we conducted a review of the policy debate and international approaches to regulation. This was then followed by an assessment of the Consumer Finance Association's Code of Practice for payday lenders published in July 2011, and a policy seminar to discuss the trends in payday lending regulation in the UK, US, Canada, and Australia in November 2011. This work has now informed the recommendations made in our latest briefing paper, 'How to regulate payday lending: learning from international best practice',released on 16th December 2011, in which we recommend that:

  • The Office of Fair Trading should set out a payday lending ‘sector specific addendum’ to its Irresponsible Lending Guidance which makes clear that maximum loan values should not exceed one quarter of net monthly income; multiple loans, and ‘rollover lending’ are prohibited and, in order to avoid one payday loan from being used to pay off another, that there must be a 24 hour gap between usage of the product; and that borrowers in financial difficulties should be provided with assistance to reduce their level of debt without incurring additional charges.

  • The Department for Business, Innovation and Skills should commit to putting in place a cap on the total cost of credit that can be charged and establish an independent Commission to advise it on the level at which this should be set.

  • The Office of Fair Trading and the payday lending industry should put in place a national payday lending database by April 2013, paid for by a levy on transactions, and modeled on the best practices of the US by also providing people applying for payday loans with access to money advice services.

The latest briefing is available here.

You can read the CfRC's press statement concerning the CFA code of practice here.

The October 2010 review of the policy debate, which also includes a comparison of the cost of payday loans to overdraft and credit card borrowing, is available for download here.