How payday lenders are regulated by the Financial Conduct Authority (FCA)
“Payday lenders have cleaned up their act”
Since 2014, the FCA has introduced numerous regulations which have dramatically changed the landscape of the payday loan industry. ‘Authorised’ lenders now have to meet conditions set by the FCA to operate and new rules are in place such as price caps, risk warnings and restrictions on rollovers which have ultimately reduced default rates and average loan charges for customers.
Until 2014, payday loan companies, unlike other financial institutions like banks and insurance companies, were regulated by the Office of Fair Trading. Now this sector has been brought into line and the same independent regulator, the Financial Conduct Authority, has the power to set and enforce standards for the payday loan industry as well.
The clampdown came after payday loan companies had earned themselves a bad reputation for charging high interest rates on small loans, giving people the impression that payday lenders were out to take advantage of vulnerable customers.
However, with the introduction of new industry regulation, these ‘loan shark’ lenders have been forced out of the market and the companies that remain must comply with strict guidelines to ensure customers are treated fairly.
As a result of the new FCA regulation, a number of payday loan companies were forced to close down as their lending practices did not comply with the new set of rules.
The FCA had two important goals in mind when introducing its new regulations. Firstly, to protect all borrowers from being misled and overcharged by unscrupulous lending behaviour and secondly, to prevent those struggling to repay from being crushed under quickly spiralling debts.
What were the main changes?
- Lenders must adequately assess ‘creditworthiness’ and the affordability of the loan for the customer before it is issued
- A cost cap of 0.8% per day for all high-cost short-term credit loans was introduced
- Default fees for late repayment were capped at £15
- Total cost cap of 100% of the amount borrowed – so borrowers can never repay more than double the amount originally borrowed
- Lenders can only agree to extend, or ‘rollover’, a customer’s loan twice and must provide an FCA information sheet, containing details of organisations offering debt advice, when they do so
- Lenders are limited to two unsuccessful attempts to collect a repayment via Continuous Payment Authority (CPA) and cannot attempt to collect a part payment via this method
One effect of the new measures, particularly the price caps, has been that less customers than before will be approved for a payday loan. Consequently, this protects potentially vulnerable potential customers who would actually be more likely to harm their financial situation by using payday loans.
The 2017 FCA review showed that the changes have had a significant positive effect for borrowers and focus for reform has now shifted to other areas of high-cost short-term credit (HCSTC) which are not operating to the same standards.
One of the FCA’s biggest areas for concern is now unarranged overdrafts.