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UK household debt is £1.57 trillion and rising ... but credit regulation could slow rate of increase

UK household debt is at its highest point since 2009 - and is still growing.

Total debt currently stands at £1.574 trillion and is expected to jump by 43% in the next five years according to the Office for Budget Responsibility.

But the arrival this month of stronger regulation of the consumer credit market, however, could slow down the rate of increase.

Two forms of lending that have helped to fuel the debt boom of recent years are payday loans and peer-to-peer lending. These activities are now being regulated by the Financial Conduct Authority (FCA) along with the rest of the consumer credit market. Alongside credit cards, overdrafts and other forms of loans, they will now be subject to increased scrutiny alongside the debt management industry which has made money out of selling its services to borrowers in trouble.

While payday loans have attracted considerable negative publicity due to high interest rates and dubious debt-collecting practices, peer-to-peer lenders such as Zopa and Ratesetter have recently received the seal of respectability from the Chancellor. As The Herald predicted a month ago, this lending will now be brought within the scope of ISAs in the coming tax year.

Peer-to-peer lending more than doubled in size last year. At the end of 2013 there were over 70,000 consumers and 3700 businesses borrowing through this channel. Peer-to-peer lending was first introduced in the UK in 2005 to enable consumers and businesses to lend to each other.

Lenders are attracted by the higher interest rates they can receive on their money than in conventional savings accounts while borrowers can also get competitive deals depending on their circumstances.

The FCA will now have responsibility for protecting consumers borrowing money (although not business borrowers) and the clients lending the money.

Firms operating lending platforms will have to follow the FCA rulebook and take reasonable steps to ensure existing loans continue to be administered if the firm goes out of business.

But one peer-to-peer lender has argued that regulation does not go far enough as it fell short of compelling lenders to carry out due diligence on all loans available on their platforms. Christian Faes, co-founder of LendInvest, says: "We fear it will not protect the public from loan defaults in the peer-to-peer sector."

Participants will now be able to complain to the Financial Ombudsman Service if they have any unresolved problems with their providers. However, consumers who put money in will not be covered by the Financial Services Compensation Scheme, so if borrowers default on their loans they could lose money.

But Kevin Mountford, credit expert at Moneysupermarket.com, believes the providers are aware of the potential problems. He says: "The success of peer-to-peer lending is dependent on lenders having confidence in the system, so platforms are well aware of the need to check on ability of borrowers to repay. Some are developing funds and insurance to protect lenders."

In the meantime, the FCA's top priorities are improving the business practices of payday lenders and debt management companies. Immediate changes being imposed on payday lenders include limiting the number of loan roll-overs to two, restricting the number of times a firm can seek repayment using a continuous payment authority to two and requiring that customers are provided with information on how to get free debt advice. Meanwhile debt management firms will have to pass on more money to creditors from day one of a debt management plan, and protect client money.

Yvonne MacDermid, chief executive of Money Advice Scotland, a charity which offers free debt advice, welcomes the increased regulation of the payday loan sector. She says: "We think it is key that the pay-day lending industry starts carrying out more affordability checks up-front.

"Now that they can no longer rely on the repeated use of continuous payment authorities, they may decide to start making greater use of credit reference agencies."

In the coming year, the FCA will be carrying out further research into how payday lenders collect debts and treat borrowers in arrears. It will also monitor debt management companies. Other sectors that will come under the FCA's scrutiny in the coming year include credit cards, overdrafts and logbook loans.

The activities of credit unions, which have been regulated for more than ten years, do not feature on the FCA's list of concerns at present. Paul Macfarlane, head of operations at Glasgow Credit Union, says: "We don't compete with payday lenders. We do try to fix the problems they create by providing consolidation products with more affordable repayments. We can also provide our members with an Everyday Loan account from which they can draw small amounts to help them to budget."

Greater regulation of the credit sector is not without its concerns. The FCA concedes its rules could affect some firms' willingness to stay in the market and could make credit products more expensive or hard to access. Some fear the reappearance of loan sharks.

Restraining the activities of payday lenders is also unlikely to lead to a rapid fall in the need for debt advice says Ms MacDermid. "Against the background of welfare reform, it is difficult for some families to find the money they need for their everyday spending needs.

"They are struggling with fuel debts and water debts. Traditional debts to lenders are only a part of the picture."

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