How Has the FCA Changed the UK Payday Loans Market?

When the OFT (Office for Fair Trading) were responsible, the payday lending market was inefficiently regulated.  Although firmsnominally abided by the terms of the Consumer Credit Act, they largely acted as if there were no regulations at all.  The technology of applying online, the lack of affordability checks and the fact that borrowers could easily refinance the loans all meant that it was easy for borrowers to start out with a small loan which could spiral out of all control once interest charges and late fees were added.  Some payday firms also had unscrupulous and unethical business practices.  For example, they would often threaten to get the money repaid as soon as possible or encourage the borrower to take out another larger loan.

Payday loan regulationsbecame more robust when the FCA took over in April 2014.  Apart from ensuring that all consumer credit firms were registered with them, the regulator began with a price cap.  This important piece of regulation restricted how much payday lenders were allowed to charge their borrowers.  Even after all fees were calculated, no lender could charge more than double the original sum borrowed. 

Another problem was the way some companies abused borrowers’ consent to a CPA (Continuous Payment Authority).  Not only would they keep taking payments when it was obvious the borrower was experiencing financial problems, but they would also take partial payments.  In some cases, this would wipe out people’s bank accounts leaving them no money for their day-to-day living expenses.  The FCA stipulated that lenders couldn’t take partial payments and could only try to withdraw the money owed twice before they had to contact the borrower directly. 

A major concern of the FCA was that borrowers should be better-informed.  As well as introducing rules that payday loans should carrya risk warning, they ruled that their sites should also refer potential lenders to debt advisory services.  This idea was taken one step further when they also introduced a rule that all payday lenders had to be present on at least one price comparison site.  The idea was that this would encourage borrowers to shop around before taking out a loan.

Successive regulations have had an enormous impact on the UK’s payday lending market.  As a result of the FCA taking over, the number of payday firms in the market fell dramatically as the unscrupulous realised that they wouldn’t be able to make easy money.  The companies that remained realised that they could still make a profit and follow ethical business practices.  This meant that there were 800,000 fewer payday loans issued in the 18 months after the FCA took over.

Bad credit payday loans are possible from a direct lender.  The question isn’t that borrowers have been guilty of poor money management skills, but they shouldn’t be penalised for this.  Reputable firms will carry out a credit check, but their most important concern is borrowers can afford the repayments.