Farewell payday lenders, welcome loan sharks?

pounds and coins Image copyright PA

This morning, the screw that is being slowly tightened on the payday loan industry was given another couple of swift turns.

The Competition and Markets Authority, the regulator that took over from the Office of Fair Trading and the Competition Commission, has announced proposals to force payday loan companies to be more transparent about how they charge for short term credit.

It is demanding comparison websites so that people can compare rates and a mechanism that will tell recipients of loans exactly how much they are repaying - interest and other charges included.

It also wants to see a crackdown on the murky world of "lead generators" - intermediaries that sell details of customers wanting a loan to the payday companies.

Customers might believe these lead generators are shopping around for the best deal, when in fact they are often selling to the loan operator who will pay them the highest fee.

The CMA's proposals, which will now be consulted on, are a sensible way to improve competition and transparency in the market. Letting the sun shine in is often the best disinfectant.

They are also part of a trend towards cleaning up the payday loan market, which has grown up largely unregulated since the 1990s Cheque Act allowed people without a bank account to cash cheques for an upfront payment.

The Financial Conduct Authority took over the regulation of the sector last April.

It has already obliged Wonga, the largest operator with a third of the market, to change its lending criteria and write off the debts of 330,000 customers who were offered money on inappropriate terms.

Wonga's profits have collapsed as the regulators have taken action and the FCA has said it is likely that more than 90% of the sector will close down when its next move - a cap on interest rates and amounts repaid for loans - comes into force.

That would leave about four operators.

Controls on payday loan companies will be welcomed by many of course. But it is also worth considering the unintended consequences.

Many payday loan customers are quite able to deal with short term credit, using them as an alternative to the eye-watering charges linked to unauthorised overdrafts from a bank.

The problem was the payday loan companies made a significant chunk of their money lending to people who could ill afford it, and then were trapped in a situation where debts were rolled up month after month.

The interest rates and charges on the loans then hit stratospheric levels.

But for those without bank accounts and who find - month to month - they are struggling to make their budgets stretch, there will need to be an alternative if the payday sector becomes largely indistinguishable from the mainstream banking market.

Credit unions will have to look at how they are supporting this significant group of people - a financial underclass too often ignored and often unbanked.

The number of loans being offered by the payday loan sector is falling dramatically - by more than half according to the Consumer Finance Association.

But has demand fallen as rapidly? I doubt it.

And unmet demand can lead in one very unpleasant direction for people who might be desperate. The return of the loan shark.