Special features
Payday loans are not appropriate for clients who are already in financial difficulties. In fact, they are likely to exacerbate any pre-existing financial problems. This is because, in such circumstances, it is extremely unlikely that the client will be able to repay the loan on the due date (typically within 31 days) and so, in addition to interest, s/he will have to pay a late payment fee (which must not exceed £15).
Since 26 May 2017, payday lenders must advertise on at least one FCA-approved price comparison website and prominently display a link to that site on their own website.1FCA Handbook, CONC 2.5A From 2 January 2015:
•interest and charges must not exceed 0.8 per cent per day of the amount borrowed (the ’initial rate’);
•default charges must not exceed £15 and interest on unpaid balances and default charges must not be more than the initial rate;
•clients must never have to pay back more than the amount borrowed in interest and charges.
Two of the requirements to provide the client with adequate pre-contract explanations (see here) are of particular relevance to payday loans. •Features of the agreement that may make it unsuitable: payday loans are a short-term product and are unsuitable for supporting borrowing over longer periods.
•Features of the agreement that may operate in an adverse manner: the effect of ’rolling over’ such loans could accumulate an unmanageable level of debt. The codes of practice of the four trade associations for payday lenders issued on 24 May 2012 (known as the Good Practice Customer Charter) state that creditors should:2For a discussion, see H Hollingworth, ‘Payday Lenders Good Practice Charter: one year on’, Quarterly Account 31, IMA ◦not pressure clients to roll over loans;
◦only consider rolling over a loan if a client asks; and
◦tell clients if there is a limit on the number of times a loan can be rolled over.
If a client is in financial difficulties and informs the creditor, the creditor should explore new arrangements for paying the debt with her/him.3See Financial Ombudsman Service decision in Ombudsman News 109, 2013 (Adviser 158 abstracts) On 7 August 2020, the FCA published its report into relending of high cost credit, which includes payday loans (see here).
Continuous payment authorities
The most common method of repaying a payday loan is by debit card. Unlike standing orders and direct debits, there is confusion about whether clients can cancel a debit (or credit) card payment authority (known as a ’continuous payment authority’ if it is for ongoing payment arrangements).
In the past, many banks have advised their customers that, in order to cancel a continuous payment authority, a client must approach the creditor as there is no automatic right to cancel. However, this advice appears to conflict with the provisions of the Payment Services Regulations 2009 and the correct legal position appears to be that a client has the right to cancel a continuous payment authority directly with her/his bank or card issuer by informing it that s/he has withdrawn her/his permission for the payments. The payments must then be stopped and the bank cannot insist that the client contact the payee to agree to this first.4See A MacDermott, ‘CPAS: the facts behind the myths’, Adviser 150 The Financial Ombudsman Service also agrees with this view.5See Ombudsman News 103 Unless a continuous payment authority is cancelled as described above so that a client is not pressurised into rolling over loans and can instead try to agree an affordable payment arrangement with the lender, s/he could find her/himself with an unauthorised overdraft, subject to interest and charges, and without money to meet essential expenditure. The client may have to extend the loan, for which a fee may be charged. This means that the outstanding balance will rapidly escalate due to the high interest rate and will further exacerbate the client’s existing financial difficulties.
There are restrictions on requesting part-payment under a continuous payment authority and on the number of times the creditor can request payment when previous payment requests have been refused.
•The creditor cannot make a further request for payment of an instalment due under the payday loan where two previous requests have been made for payment of the same instalment and been refused.
•The creditor cannot make a request for payment of any further instalments due under the payday loan unless it has informed the client of the refusal of the previous payment requests, the client has paid the missed instalment using a payment method other than a continuous payment authority and is not in arrears, and the creditor has reminded the client of the date and the amount of the next instalment due under the agreement.
•The creditor cannot make a request for payment of a sum which is less than the full sum due under the payday loan at the time of the request unless the creditor has entered into a repayment plan with the client which provides for one or more reduced payments, the client has been notified of the number, frequency and amounts of those payments and has given express consent to the creditor to make payment requests to collect the payments due under the repayment plan.
However, the creditor is not prevented from accepting payment (including part-payment) from a client using a means of payment other than a continuous payment authority – eg, a single payment using her/his debit card details.6FCA Handbook, CONC 7.6.12 - 7.6.15A