Any loan works on the principle of having a lender and a borrower of the money and then returning the money within a specified time period along with a specified amount of interest. Payday loans work in a similar manner as well, except for one difference that the borrower must return the money on their next payday. This means that the time period for payday loans is quite short. Moreover, the interest rate is higher.
Before the Regulations for Payday Loan Industry were Imposed
Financial Conduct Authority (FCA) regulates payday loans industry in the UK. However, it was not the case in the beginning when payday loans were first introduced. They have only taken charge of the scenario in 2014. When there were no regulations for the payday loan industry, things were not running smoothly.
Although initially the payday loan industry flourished and there were brands advertising their services everywhere, soon things changed as the public started calling payday loan lenders as loan sharks. This led to major shrinking of the industry’s market value, leading to huge losses.
Considering the huge number of complaints, Financial Conduct Authority (FCA) had to take control. Major transformation of the payday loan industry was then witnessed after FCA regulations were introduced in January 2015.
Introduction of regulations by Financial Conduct Authority(FCA)
The FCA took over from the Fair Trading Office and in April 2014, started regulating the payday loan industry. Taking into account the fact that in 2014 around 29,000 complaints related to payday loans were submitted to The Citizens Advice Bureau, FCA decided to take a tough stand. The actions taken by the authority resulted in huge losses to the big industries because of fines and in some cases, refunds.
Moreover, FCA introduced a price cap for the payday loans to address the issue of high interest rates. This action was taken in January 2015. This price cap was fixed to be 0.8% per day. Moreover, the borrowers will never be paying more than double of what they borrowed no matter how many days have passed.
Moreover, rolling over was banned and the default charge was set to a maximum £15. Banning the practice of rolling over was a great step to curtail the practice of borrowing money at higher rates. This is because people borrowed money even when they were aware that they would not be able to pay back the money since they had the option to rollover.
While enforcing the price cap resulted in lowering the payday lenders’ as well brokers’ profit margins, it at least restored the trust of serious borrowers in payday loans.
Authorisation from FCA for Trading
The FCA made it mandatory for all the companies trading in payday loans to apply for a formal authorisation. Firms were also encouraged, as a short-term solution, to opt for interim permission. This will fulfil their long-term goal to get complete permission given that the regulator fully approves of the company’s staff, products, and especially their procedures.
With the implementation of these rules, in 2016, only the most responsible lenders stayed back in the market and continued to float while many other lenders as well as brokers were forced to leave the market as they fell short of the criteria or because they failed to make any profits under the new rules and regulations.
As a result of these rules, the number of complaints relating to the payday loans decreased. This is also because several of the introducers were removed as well. These introducers only collected data from the customers online and distributed it to the third parties, charging a lot of money for this service. Only introducers following the rules of the FCA are allowed to work now. This has improved the otherwise deteriorating reputation of the payday loan industry.
Google’s Ban on Payday Loan Advertisements
Another promising factor in changing the game of the payday loan industry was Google’s announcement in May, 2016 to ban all of the paid advertising content related to payday loans on their search engine. To be specific, this ban is subjected to any loan that asks for an APR higher than 36% and for the loans that are to be returned in less than 60 days.
This is the biggest game changer for the payday loan industry. Since they are no longer allowed to advertise their content using advertisements, they have to make their mark in the organic search engine results of Google utilising search engine optimisation techniques. This is indeed hard to do especially for the new entrants.
The future of the Payday loan industry
Now the question arises that with all these rules and regulations, what is the future of the payday loan industry? With the successful and effective implementation of the new rules, least-compliant lenders are being removed from the market and only the responsible parties that are interested in doing the business instead of making easy money are left behind in the market.
Moreover, these regulations are also hindering the entrance of such new lenders as well, who are not responsible enough to handle the business. Therefore, it is safe to say that these rules have played a great role in improving the industry’s reputation.
Furthermore, FCA has looked into the matter to come up with a few rules, which control the large-scale collection system of the loans. These rules are directed towards banning the use of Continuous Payment Authority and replace it with a simple debit system. This will be empowering for the customer.
Other changes include loan companies being encouraged to offer long-term loans such as 3, 6, or 12 month loans. This practice of offering long-term loans and urging the customers to make the repayment earlier will help the customers with managing their finances in a better way as the pressure of the end of the month finances will be removed.
However, one of the important points in the new policy of the FCA is about comparison sites. They have encouraged the customers to use the comparison sites in order to check the options and costs offered by different lenders before they apply.