The FCA said that payday lenders will be forced carry risk warnings on all their marketing and carry out affordability checks for every credit agreement to ensure that only those who can service the debt repayments are offered a loan.
The changes have been set out in the regulators framework of how it intends to regulate the industry once it is transferred from the Office for Fair Trading in April 2014.
Martin Wheatley, chief executive of the FCA, said: “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."
Parliament's Public Accounts Committee has urged the FCA to crack down on payday lenders with PAC chairwoman Margaret Hodge branding such firms as "unscrupulous" and claiming they use "predatory techniques".
Andre Spicer, professor of organisational behaviour at Cass Business School, welcomed the FCA’s warnings to the sector but fear its plans may not be going far enough.
He said: “The regulations announced by the FCA on payday lenders only get to first base. The regulations do not address the usurious rates of interest charged.
“Nor do they ask whether the industry should exist at all. This is surprising because Australia and other European countries have put a cap on interest rates. Most states in US have effectively banned payday lenders.
“The industry claims such measures will push borrowers into the illegal market. But this claim is far from certain for the mass of borrowers who would never consider going to a loan shark.
“A ban would probably push the majority of lenders to explore more ethical alternatives like community credit co-ops.”
Spicer also slammed the FCA’s plans to introduce affordability checks. He said: “This measure is unlikely to improve the quality of lending decisions as firms like Wonga already have incredibly advanced credit scoring systems.
“However adding an additional delay is likely to make borrowers think again and explore a wider range of cheaper and more ethical options.”
