LONDON (Reuters) - Britain's financial watchdog drew fire on Thursday for failing to impose a cap on the huge interest rates imposed by payday lenders as it set out its plan to discipline the industry.
The Financial Conduct Authority (FCA) warned it would impose much tougher rules on payday lenders - which provide short-term loans intended to tide borrowers over till payday - forcing them to check whether borrowers can afford their loans and limiting the number of times those loans can be extended.
"Today I'm putting payday lenders on notice: tougher regulation is coming and I expect them all to make changes so that consumers get a fair outcome," FCA Chief Executive Martin Wheatley said. "The clock is ticking."
The payday loan industry has boomed in the wake of the financial crisis as banks seeking to avoid risky loans turn away customers who are struggling to manage household budgets.
Wonga, one of the biggest payday lenders in Britain, reported a surge in profit last year, saying it had lent 1.2 billion pounds. Wonga - who had no immediate comment on the FCA's announcement - charges an annual interest rate of 5,853 percent, according to its website.
Unite, Britain and Ireland's biggest trade union which represents 1.4 million workers across all sectors of the economy, said the measures were "too little, too late."
"They fail to deal with the real reason people who borrow from a payday lender end up in deep financial trouble, which is the criminally high interest rates these lenders can get away with," said general secretary Len McCluskey.
Britain's opposition Labour party said the government should impose a cap on payday interest rates straight away. Chris Leslie, the opposition finance spokesman, said lenders were "making a mint while ministers sit on their hands."
The FCA, which has powers to impose a cap, said it was concerned that doing so could make it harder for people to borrow and push them into the hands of backstreet loan sharks.
Australia, most parts of the United States and some European countries have slapped a cap on payday loan interest rates, said
Andre Spicer, a professor at London's Cass Business School, who argued that imposing a cap would push lenders to consider more ethical alternatives like community credit co-ops.
The Archbishop of Canterbury, Justin Welby, has campaigned for tighter control of the industry and pledged to use the Church to build up credit unions to compete with payday lenders.
He told Reuters the FCA's measures would protect "those most at risk from the dangers of an uncontrolled slide into unmanageable debt" and welcomed the introduction of a curb on how often lenders can retrieve payments.
The FCA said loan companies would only be allowed to dip into a customers bank account or credit card twice to obtain payment after normal collection has been unsuccessful, a practice known as continuous payment authority.
"The publication of the FCA's rule book is an important milestone for the entire consumer credit industry, and an opportunity to set a bar over which irresponsible lenders will struggle to jump," said Russell Hamblin-Boone, Chief Executive of the Consumer Finance Association, which represents the major short-term lenders operating in the UK.
A government survey released on Thursday showed payday lenders were not fully complying with industry standards designed to protect consumers.
Nearly a quarter of consumers were put under pressure to extend their loan and about half said lenders did not explain the risks to them of doing so, said the survey of more than 4,000 people.
"This research shows that the industry has failed to self-regulate effectively. We warned the industry months ago that if it didn't get its house in order we would step in," said government minister Jo Swinson.
The FCA, which takes over supervision of credit firms from next April, said it would also examine peer-to-peer lending - websites which allow savers to earn interest by lending money to other members of the public. The sector's rapid growth has prompted some concern that not all individuals are aware of the risks and protected.
(Reporting by Kate Holton, Tom Bill, Huw Jones, Matt Scuffham, Kylie MacLellan, Clare Hutchison and William James; Editing by Sophie Walker)