Tougher rules for payday lenders take effect

Published: 01/07/2014   Last Modified : 01/07/2014

Additional rules for payday lenders and other firms offering high-cost short-term credit take effect from 1 July 2014. Find out more about what these lenders now have to do.

Firms offering high-cost short-term credit must now follow additional rules on rollovers, continuous payment authorities and risk warnings.

These rules apply to agreements in place on 1 July 2014 and entered into after this date.

Rollover restrictions

Where a borrower cannot afford to pay back a loan many lenders offer the opportunity to ‘rollover’ or extend the loan.

While a rollover may work well for some borrowers, we are concerned that loans that are repeatedly rolled over can lead to an unsustainable debt burden for many borrowers.

Payday lenders and other firms offering high-cost short-term credit must now limit the extension of loans to two rollovers.

Where a high-cost short-term loan has been rolled over twice, including before 1 July 2014, lenders will not be able to rollover the loan again.

Before rolling over a loan these lenders will also have to give the borrower an information sheet that explains where and how to get free debt advice.

Regular payments

A continuous payment authority (CPA), which may also be called a ‘recurring payment’, is where a business has permission to take a series of payments from a customer’s debit or credit card.

Payday lenders and other firms offering high-cost short-term credit often use CPAs to claim repayments.

We found some firms were using CPAs as a debt collection method and that some borrowers therefore had difficulties paying for essentials such as food and heating.

High-cost short-term lenders are now limited to two unsuccessful attempts to use a CPA to take a repayment and cannot use a CPA to take a part-payment.  

However, the borrower will be able to ‘reset’ the CPA following two unsuccessful attempts to use a CPA, when the agreement is rolled over or refinanced.

There are similar rules for loans that are to be repaid in instalments and strict conditions around resetting a CPA, to ensure customers remain in control of their finances.

Risk warnings

Firms offering high-cost short-term credit must now include a prominent risk warning on all financial promotions.

These lenders had to include a risk warning on all financial promotions in electronic communications since 1 April 2014 (unless the medium used makes this impracticable).  The risk warning is now also required on print, TV and radio promotions.

Further information

We took over regulation of the consumer credit market on 1 April 2014.

There are other rules that high-cost short-term credit lenders must follow – see our final rules for consumer credit firms.

You can see our definition of ‘high-cost short-term credit’ in the glossary of our Handbook.

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