In recent years, those operating in the regulated payday loans industry have faced a raft of new rules enforced by the Financial Conduct Authority (FCA) and the Competition and Markets Authority (CMA).
The new rules
- From this May, all online lenders are now required to advertise on at least one price comparison site and also to show a link to this.
- Both online and high street payday lenders now need to provide existing customers with a summary of their cost of borrowing. This will say what the total cost of their most recent loan was, as well as the cumulative cost of their borrowing with that lender over the previous 12 months, and how late repayment affected their cost of borrowing.
- In January 2015, the FCA imposed a cap on payday loan costs in January 2015 - this meant interest and fees on all high-cost short-term credit loans were capped at 0.8% per day of the amount borrowed.
- If borrowers cannot repay their loans on time, default charges must not exceed £15. In addition, the total cost, to include fees and interest, is capped at 100% of the original sum. It also means no borrower will ever pay back more than twice what they borrowed.
Has regulation gone too far?
Whilst it was clear that more regulation was needed, it can create significant negative consequences for those it is meant to help. As such, the FCA continues to probe the market and is poised to release the findings of its ‘call for input’ review into the effects of the price cap and if it should be changed. Notably the regulator wants to know whether being set at its present level means more consumers are turning to illegal loan sharks.
This FCA work will also at other aspects of the market including bank overdrafts, specifically those that are unauthorised, as these have been criticised for their high level of charges.
More are being rejected
Higher risk borrowers tend to have far more need for payday loans and this in itself can create a difficult environment for those looking to offer suitable products at the right interest rate while remaining compliant. Tighter acceptance methods mean more are being turned away.
The Consumer Finance Association, which represents payday lenders, says the price cap has already resulted in 600,000 fewer consumers having access to credit. It says the number of loans being approved since 2013 has fallen by 42%. It is understood more are finding it harder to pay their utility and council tax bills as a result.
This is a highly regulated sector
But, where are these customers going? There are fears that more may be using loan sharks, who not only charge more, but can also use threatening behaviour to ensure repayment. While the payday loan sector has faced criticism from some, it should be remembered that there are some firms of good repute, who are not only FCA registered, but they also abide by an industry code of conduct and take risk management seriously.
There is no doubt that payday loans have a place for those who simply cannot make ends meet, whether they are waiting to be paid or have a sudden emergency to pay for – such as a broken boiler in winter, for example.
Many are using them and the Sunday Mirror reported in April that 17 nurses a day were applying for payday loans, in addition to a quarter more requesting hardship grants from the Royal College of Nursing.
Finding a balance is key
There is no doubt a well regulated and transparent payday loans market can offer a helping hand, providing the borrower understands the charges. For risk managers, conducting proper due diligence is essential to ensure these new rules are followed. But also, regulators need to realise if loans can be offered in a well-managed risk framework, then those payday loan providers need regulation that is proportionate.