Recent rule changes to the lending practices of payday loan companies are unlikely to give better protection to borrowers.

The Finance and Leasing Association (FLA), announced it had updated the code of practise for payday loan firms.  Following pressure from consumer groups and the Government the FLA have introduced a new rule that states that a payday loan can only be rolled over 3 times.

However, consumer groups warn this won’t protect lenders and that firmer action needs to be taken to stop customers from running up huge debts.

The rules set by the FLA cover short-term loans, also known as payday loans.  These offer customers small amounts of money to be repaid over a short period of time.  However, charges soon stack up if the borrower is unable to repay the loan in the agreed time. Rolling the loan over results in the customer paying huge interest rates of more than 4000%.

Stella Creasy, Labour MP for Walthamstow, has been campaigning for the government to bring in caps on the cost of short-term loans.  She feels that the LFA’s plans do not go far enough and they are just “tinkering around the edges”.

“What we’ve seen in America is that if you limit roll overs people then pay off the loan and take out another loan straightaway,” she says. “A limit on roll overs will only work if you have a limit on taking out a new loan, say 28 days.”

A spokesperson for the debt advice charity the Consumer Credit Counselling Service, expressed her concern saying that it had seen “quite a large number of people” who had be allowed to roll over loans at least three times.  However, she said that it would prefer to see restrictions on lenders rolling loans over at all, rather than reduce the number of times.

Payday loan companies have been criticised by consumer groups and debt management companies for their lending practices, including charging astronomically high interest rates and using debt collectors when customers cannot repay the loans.

The FLA wants its members to make the terms and cost of borrowing clear to customers before they sign up for loans and to ensure they understand that the loan is a short-term loan which can only be rolled over 3 times.

Head of Consumer Finance at FLA, Fiona Hoyle, said: “A maximum of three roll overs is allowed, but only if the customer has asked for this and a proper credit assessment has been carried out each time. The code sets additional standards for responsible lending and a cap on roll overs is an essential part of this.”

The Office of Fair Trading (OFT) is due to announce its review of the payday loan industry but Ms Creasy fears that lenders are acting now in an attempt to avoid further regulations.

The body which represent a vast majority of payday loan companies, the Consumer Finance Association (CFA), said it was working on an “enhanced code” along with the Department for Business Innovations and Skills.  It hopes to launch this later in the year.

Chief Executive, John Lamidey, stated that introducing a cap on roll overs could lead to customers simply going elsewhere for credit and ending up in more debt.

“It may well be that we will bow to political or activists pressure and come up with a number [to limit roll overs], but I’m not sure we will do so in the best interests of consumers,” he said.

He added: “The FLA’s code, while very comprehensive, only regulates one payday lender. The CFA represents a number of the largest short-term lenders in the UK, so our code will reach significantly more consumers.”