British payday lenders will face limits on how many times they can try to take money out of borrowers' bank accounts, under new Financial Conduct Authority (FCA) rules.
The FCA takes over responsibility for consumer credit regulation in April and has set its sights on payday lenders such as Wonga, which have been coming under fire from politicians and consumer groups.
The watchdog plans to restrict the number of times a lender can take money out of a borrower's account using a Continuous Payment Authority (CPA) to two.
A government survey of 4000 payday loan borrowers published today shows that nearly a third felt that the CPA process was not clearly explained to them and nearly 60% were not told how to cancel it.
The FCA also plans to limit the number of times a loan can be rolled over to two and every borrower that rolls over a loan will have to be told where they can get free debt advice. Meanwhile, affordability checks will need to be carried out for every credit agreement and a tougher stance on misleading advertisements will be taken.
While stressing that the industry "has a place", FCA chief executive Martin Wheatley warns: "Today I'm putting payday lenders on notice: tougher regulation is coming and I expect them all to make changes so that consumers get a fair outcome. The clock is ticking."
Consumer Minister Jo Swinson says: "We warned the industry months ago that if it didn't get its house in order we would step in. Now the FCA has come out today and published strong actions which will tackle the problems the market has failed to address.
"Checking whether people can afford to take out loans, people being unaware that money can be withdrawn from their bank accounts on a priority basis, advertising and pressure to rollover loans are all issues that still keep cropping up."
However, Labour MP and payday lending campaigner Stella Creasy has slammed the government for opposing - for now - a cap on interest rates that lenders charge.
Creasy also questioned the effectiveness of the CPA change, saying: "It's right that we reform how CPAs are used, but limiting the number of times they can be used doesn't deal with the amount the firms are taking from bank accounts which is the real source of problems."
Meanwhile, the FCA also wants to step up scrutiny of the peer-to-peer lending industry, making firms give borrowers explanations of the key features of the loan - including the key risks - before an agreement is made, and assess the creditworthiness of borrowers before granting them credit. A 14 day cooling off period will also be brought in.