LURID headlines last week about the Financial Regulator's plans to tighten rules on licensed moneylenders suggested that the vulnerable consumers of Ireland are to be rescued from the jaws of a pack of hungry "loan sharks", shake-down hustlers and unscrupulous Shylocks ready to extract that pound of flesh for the merest of debts.

The regulator doesn't put it that way, but the watchdog is quite keen to "level the playing field" in financial services by putting moneylenders under the same scrutiny as banks, insurers and intermediaries – a plan the moneylenders themselves welcome in principle, but in practice seem quite nervous about.

Given that recession stalks the land and banks have tightened their grip on the wads they're lucky enough to hold, now might not be the best time to clamp down on the lenders of last resort in the retail market. The cure could be worse than the disease, according to moneylenders, who have already noted an increase in business over past year as the lending market contracted.

As the credit crunch continues to bite, several major banks have turned to lenders of last resort of their own – the central banks which prop up the global financial system – for liquidity lifelines as the price and availability of funding has moved out of reach. In Ireland, Irish Life & Permanent tapped the European Central Bank for 12% of its funding in 2007. Other banks have been doing the same in Europe, the UK and the US.

There's nothing necessarily wrong with IL&P or other institutions relying on the central banks. It's just that, at critical times over the last year, there simply has been no other place to turn for the funding they needed to keep their businesses afloat.

In the retail market, moneylenders are the lenders of last resort for many people, the ones you turn to when other options aren't available. Credit card maxed out? At your overdraft limit? Can't get a personal loan? The moneylender might be your only source of badly needed funds.

300,000 loans a year

Ireland's 50 licensed moneylenders provide about 300,000 people a year with small loans, usually well under €1,000. In a country where 17% of people still have no current account, it's no surprise this kind of service is popular.

"At some stage, like now, the banks won't be so free with their money," says Pat Quinn, director of R&P Credit and a spokesman for the Consumer Credit Association, an umbrella organisation for licensed moneylenders. "If they can't get money elsewhere, some people will come to us."

Quinn says his members have noted "slightly more enquiries" than this time last year. He says it's a natural response to tougher terms and conditions at mainstream lenders. But despite increasing volumes, he expects his sector to contract over the next five years "to just a few operators" if the Financial Regulator puts through its Consumer Protection Code (CPC) for Moneylenders.

So why does the Financial Regulator seem so keen to slap new regulations on these lenders precisely when other sources of credit are becoming more scarce and, therefore, expensive?

The CPC for Moneylenders didn't just drop out of the blue. It's the culmination of nearly five years' work to create a consistent system of principles and rules that apply to the entire financial services sector. In 1995 there was the Consumer Credit Act and in 2003 the regulator instituted an interim code for moneylenders. A Consumer Protection Code came into effect last summer. On 30 April of this year, it was extended to subprime lenders, equity release and home reversion pro­viders, too. The net is widening and moneylenders are next, with a proposed date of December 2008 for the full implementation of the new code.

But the draft document published in March has provoked a very hostile reaction from moneylenders, who say more bureaucracy will put many of them out of business, to the detriment of consumers, who not only will lose access to a credit source but will see the cost of moneylending rise.

Compliance costs

Moneylending is already a relatively expensive form of borrowing – although the notoriously high APRs don't give a full cost-of-credit picture, something the regulator admits – and moneylenders say compliance costs will be passed on to borrowers.

Worse, Quinn says, tighter rules for licensed moneylenders could drive consumers to illegal operators.

"If they look to us and can't get money, what's the logical solution?" he asks.

The argument is that moneylenders are small operations dealing one to one with customers, and requirements to conduct and document financial suitability interviews or to provide extensive customer complaints procedures are inappropriate to the nature of the business and the high level of customer satisfaction the sector enjoys. In other words, there is no rationale, independent of consistency across sectors, to treat moneylenders the way large institutions are treated.

Nine out of 10 satisfied

The Financial Regulator's own research has found that the number of complaints against moneylenders is very low. Only 2.5% of people seeking advice from the Money Advice and Budgeting Service (MABS) owed money to moneylenders. Nearly nine out of 10 customers report being satisfied with the service, while an incredible 72% regard their moneylender as a "friend". How many banks can claim that?

But nobody can accuse the banks of charging 150% APR, either. With headline rates that high, it certainly seems reasonable that moneylenders should have to submit to closer scrutiny, notwithstanding the relative simplicity of the loans and comparatively high-level service they provide.

Quinn and his colleagues aren't optimistic that their concerns will alter the regulator's course. Privately, many moneylenders are angry about what they see as a misunderstanding of their business and a lack of official concern at the cost of more regulation. Publicly, they'll only say that neither the industry nor its customers wants tighter rules.

Now that the consultation period is over, it's up to the regulator and the Department of Finance to finalise the code. Given the positive welcome to the changes from the Department of Social Welfare and MABS, it's hard to see much adjustment in favour of moneylenders.