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By Lynn Malone
UK regulator, The Financial Conduct Authority (FCA) promised to crackdown on payday lenders.
On Thursday, the FCA proposed a list of 'tougher' measures aimed at stemming the increase in the number of people turning to the high interest payday loan companies, where interest on loans can often lead to people having to repay several times the amount they borrowed.
However some have questioned whether the new rules are sufficient in order to prevent those in need falling prey to unscrupulous lenders.
One is Scottish MEP Alyn Smith who said that companies should face much tougher restrictions.
"It is clear that more restrictions are needed and that is why the First Minister made a pledge in August that in an independent Scotland all payday loans companies will be subject to much tougher regulation than Westminster is currently prepared to make.
"I want to see that regulation made very strict - including the ending of Continuous Payment Authority (CPA) and a long, hard look at whether the 'instant money' offered by these companies should be available at all." the MEP said.
Newsnet Scotland spoke to three young Scots about the reality of the payday loan culture earlier this year. They spoke exclusively and candidly of the shame and embarrassment they felt about borrowing from, what most people see as "backstreet lenders" and revealed the truth behind the growing trend for payday loans amongst young adults.
One we will call Pat (not his real name) who works with a local authority was taken in by Wonga's advertising campaign last year when they sent e-mails implying that taking a loan with them could "do wonders" for people's credit rating.
Giving his response to the recent news, he said: "I also experienced my bank account being emptied; I did not have the money for the loan to pay back in my account but just enough to get by on for the week as I was waiting on a cheque clearing.
"I was unaware that Wonga could come in and take several small payments till there was nothing left in my account.
"These new plans hopefully would stop this as I was forced to seek a loan from another pay day company to live for the week which meant I had the interest on what was left from the Wonga loan increasing as well as the incurred fees from the second loan I had to take out to survive,".
Restrictions will now be put on the number of times payday lenders can unexpectedly drain money from people's bank accounts. Other changes being proposed by the FCA include lenders facing tighter restrictions on advertising which mean they may be forced to include a "risk warning" about the dangers of borrowing.
Misleading adverts will be pulled and companies could face unlimited fines for breaking the rules. And Payday lenders will have to carry out compulsory affordability checks on people applying for a loan to ensure that they are able to repay it.
One of the most lucrative methods for loan companies is when loans "roll over" where lenders offer more time for borrowers to pay but add on extra interest charges. The FCA now plans to restrict this practice.
Citizens Advice Scotland (CAS) has backed the FCA in its latest plans to regulate the Payday Loans industry, saying it's "a good step in the right direction", but have also said more action is needed to protect people from crisis debt to payday lenders.
Chief Executive Margaret Lynch said: "The number of people who are getting into problem debt because of Payday Loans has risen considerably in the last few years. At the moment Scotland's CAB advisers are seeing over 100 people a week who are stuck in crisis debt to payday lenders.
Ms Lynch says the experience of clients seen by CAS is very distressing and claims they are usually people who were on a low income to begin with, who thought a loan was their way out, but whose debts have quickly spun out of control and have brought them real misery and poverty. Many feel that the terms and conditions of the loan were not clearly explained to them, and that the high interest rates were not fully explained.
She added: "In a number of cases the lenders have gone into the person's bank account and removed money without their knowledge. In others, where people got into difficulties and asked the lender for help in repaying the loan, they were simply offered another loan, at similarly high rates.
"It is notable that the things being outlined are all areas in which the payday loans industry itself had promised to clean up its act, but has failed to do so.
"Last year the industry signed up to a Code of Conduct which included pledges on many of these specific issues. We have been monitoring the experience of borrowers this year, and the evidence is clear that many lenders are NOT sticking to those promises."
Pat, who also studies in his spare time, welcomes the changes, saying wryly: "I think the proposals are a step in the right direction. Making the application process lengthier and the repercussions more transparent means people will make an informed decision and take the time to weight up the implications it may have.
"The fact that it was fast or instant cash eliminated me from trying any other means of accessing funds, such as borrowing from my parents or speaking with the bank. However I know in a lot of circumstances this may be the only option available to someone, but for those who have not ruled out other possibilities it may give them a chance to prevent themselves getting into high interest debt."
Alyn Smith is equally sceptical and remarks: "Payday loan companies prey on people who find themselves in difficult and sometimes desperate positions. They deliberately target people when they are at their most vulnerable, offering the promise of an easy escape from their money problems - a promise that is never kept.
"Payday loans are causing heartache across the country, with CAS reporting that staff dealt with 1,200 cases related to payday loans over the summer."
Commenting on Pat, who fell victim to the payday loan companies, the SNP MEP added:
"His story is all too common, especially among young people and students. We need to ensure that as much information as possible is available to people about the dangers of payday loans and the repercussions. We also need to provide other options like credit unions and better banking.
"The ease and quick decision making process of these companies make them seem attractive but it can quickly become a huge burden for people who can't afford to pay them off.
"These new restrictions should help people a little but they are still not enough to ensure protection for vulnerable people, we need to do much, much more."
CAS is strong in the belief that action must be taken against the rogue lenders.
Ms Lynch said: "We believe it is right that the regulators should crack down on this. If the lenders themselves cannot stick to their own promises to put their house in order, then the FCA should step in and force them.
"That is what a regulator is for. So this is a good step in the right direction. But we need to see more, and tougher, action taken against rogue lenders.
"We need a lending industry that is open and transparent, and which offers consumers a fair deal but also protects them from financial ruin."