Scottish Government
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Tougher regulation for payday lending

Capping of interest rates part of multi-pronged approach to protect vulnerable.

Payday lenders would be subject to tougher regulation in an independent Scotland, with capping of interest rates and restrictions on the practice of “rolling over” debts part of a new regime to protect the most vulnerable in society, First Minister Alex Salmond said yesterday.

The First Minister said people in Scotland were getting into severe financial trouble by using short-term credit, with extremely high interest rates and huge default charges putting pressure on some of the poorest in the country.

Mr Salmond said his policy was for short-term interest rates to be capped – as they are in many countries in Europe, Japan, Canada and some US states – coupled with regulation of advertising and restrictions placed on the ‘rolling over’ of loans, which sees those unable to pay off the initial debt saddled with a bigger loan that is more difficult to clear.

The First Minister called on the UK Government to act now on this reserved issue, putting in place the multi-pronged approach of the Scottish Government that would restrict the likelihood of vulnerable people getting into financial trouble through short-term lending.

His intervention comes after representations made by Scottish ministers to their UK Government counterparts seeking a cap on interest rates as part of a toughening of the regulations surrounding the industry were not responded to.

Mr Salmond also welcomed recent moves by the Church of Scotland and Church of England to put in place more credit union facilities to help poor people access credit at reasonable rates.

The First Minister said:

“It is unacceptable that in a time of financial hardship for many in Scotland, the payday loan industry can prey on some of the most vulnerable in our society, getting them into unmanageable debt through aggressive marketing and charging interest rates that can run to thousands of per cent APR.

“I believe the whole industry must be subject to greater regulation so that we can protect those whose financial situation is desperate enough that they take out these short-term agreements and help them avoid the escalating debt problems that can arise when they run into difficulties paying off the loans.

“That is why I support a three tiered approach to the issue of payday loans. First we need to cap the interest rates that payday lenders can charge, much like the authorities have done in many European countries, such as Germany, Japan, Canada and some states in the United States. Second we must restrict the ability of payday lenders to ‘roll over’ the debt, wrapping up an outstanding loan in a further credit agreement that can easily escalate and lead to severe repayment problems. And thirdly, the industry must be subject to tighter regulation, with its aggressive marketing campaigns and widespread advertising subject to much greater scrutiny.

“The regulation of payday lenders is currently reserved. With independence we will be able to take action to protect consumers and ensure that the practices that are bringing such misery to many of the poorest in Scotland are brought under control.

“Until we get those powers, I would urge the UK Government to act now and take action on this sector. I welcome moves to clamp down on advertising, but bolder action, such as restricting the roll-over of loans and implementing the interest rate cap is required to address the problems that are evident.

“At the same time, I welcome recent moves by the Church of Scotland and Church of England efforts to establish a new credit union to help ease access to credit for the poorest in society, and take away some of the demand for payday loans. We have a good tradition of credit unions in Scotland and I support any moves to establish new sources of reasonable lending.”

Notes to editors

Payday lenders are part of the reserved consumer credit sector and are currently subject to regulation by the Office of Fair Trading, although this responsibility will shift in 2014 to the new Financial Conduct Authority. Last month, Citizens Advice Scotland reported that their advisers dealt with 1,200 cases related to payday loans over the last three months.

The Scottish Government has made representations to the UK Government seeking a cap on interest rates. Fergus Ewing wrote to the UK Minister for Consumer Affairs in April 2012 asking for an interest rate cap to be considered and this was followed up by a further written request in March 2013. Australia, Canada, France, Germany, Finland, Japan and certain US states have all taken action to introduce caps on high interest and short-term lending. These measures have been made to improve consumers’ ability to assess the total cost of their loans and prevent predatory lending to households in financial difficulty.

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