Commercial debt management industry is "opaque and poorly regulated", MPs warn

In its report on the debt management industry the Business, Innovation and Skills (BIS) Committee said the Government must take "swift and decisive action" to ensure that firms cannot take advantage of vulnerable consumers. It must also clarify if and how regulation of the industry will transfer to new body the Financial Conduct Authority (FCA) within six months.

Adrian Bailey, chairman of the BIS Committee, said that continuing confusion over regulation of the industry was an "area of ongoing concern".

"During these difficult economic times, increasing numbers of people up and down the country – not least some of the most vulnerable members of our society – are relying on the provision of consumer debt management services and payday loans to make ends meet," he said.

"The Financial Services Bill did little to clarify the way in which the consumer credit market is to be regulated. In the meantime, almost a year after the Government consultation closed, consumers and industry operators remain in limbo. This is clearly unacceptable," he said.

The Government must introduce higher licensing fees for higher-risk credit businesses and introduce a fast-track procedure for suspending licenses, the report said.

The regulator must also be given the power to ban harmful products, it said. In addition, one of its first duties should be to investigate the use of continuous payment authorities, which cannot be stopped by the borrower, by high street lenders unless lenders themselves commit to stopping their use.

The draft Financial Services Bill, which will dismantle current regulator the Financial Services Authority (FSA) and hand most of the day-to-day regulation of banks and insurers to the Bank of England, contains a power to transfer regulation of the consumer credit industry from the Office of Fair Trading (OFT) to the FCA. However, the Government has not yet announced how this power will be used.

Transferring consumer credit regulation to the FCA, which will take on the conduct and compliance regulatory role of the FSA, "provides an opportunity to significantly improve the way consumer credit is regulated and to create a simpler, more responsive regime", the report said.

The report also makes specific recommendations to protect customers who use so-called 'payday loans', or short term loans designed to cover unexpected expenditure to tide people over until their next payday. However, they have been criticised for high interest rates and allowing consumers to 'roll over' their borrowing and accrue large debts. According to Consumer Focus, the market increased from 0.3 million borrowers in 2006 to 1.9m in 2010.

Payday lenders should be forced to limit the extent to which loans can be rolled over, the Committee said, and keep proper records of transactions so that customers' credit histories can be accurately monitored. It also suggested that the total cost of loans including interest and late fees be made clearer, rather than simply displaying APR interest.

Current regulator the OFT is due to begin a payday loan company compliance review shortly. The Government must, the Committee said, "act swiftly" to deal with any non-compliance flagged by that review.

"Payday loans, by their very nature, appeal to those in serious financial need, some of whom will have low levels of financial literacy. We must be certain that this industry adheres to the highest standards – either through the codes of practice that are currently being developed or, failing that, by the new regulator," Bailey said.

The Government must also work to phase out up-front fees charged by commercial debt management companies and provide further details of its proposed Money Advisory Service, the report said.