The UK’s payday loan industry continues to see a huge transformation following the introduction of FCA regulation in January 2015.
At one point, the payday loan industry was flying, with brands advertising on every radio and TV channel under the sun and sponsoring major sports teams across the UK. Yet the once £2 billion sector has seen major changes to address its reputation of ‘loan sharking’ and ‘irresponsible lending’. A huge overhaul of its regulatory framework and advertising driven by politicians and religious figures has seen the market shrink and top lender Wonga.com to record losses of £80 million in 2015.
New regulation from the Financial Conduct Authority
The FCA began regulating the payday loan industry in April 2014, taking over from The Office of Fair Trading. Following 29,000-payday loan related complaints recorded by The Citizens Advice Bureau in 2014, a tough approach was taken.
The regulator reviewed the practices of the some of the biggest lenders, which inevitably led to £220 million fine for Wonga, £15.4 million for Dollar Financial (The Money Shop, PaydayExpress and PaydayUK) and £1.7 million for Quickquid. The fines were partially paid to the regulator and some amounts were required to refund customers that should not have received loans in the first place due to their limited criteria.
To address the high rates of interest, the FCA introduced a price cap in January 2015. This limit on what lenders could charge was fixed to 0.8 per cent per day and ensured that customers will never have to repay double what they have borrowed.
Other rules included a maximum default charge of £15 and no rollovers, which commonly caused customers to keep borrowing at high rates even if they were unable to repay their debts.
The enforcement of this price cap has caused much lower profit margins for payday lenders, which trickled down to all other brokers and introducers involved.
Companies require FCA authorisation to keep trading
The FCA required all companies wishing to trade in the payday industry to apply for formal authorisation. Firms could apply for interim permission as a short-term solution with the long-term aim to receive full permission provided that the company’s procedures, staff and product had been fully approved by the regulator.
As firms were granted permission in Q1 of 2016, the most responsible lenders have continuing to float whilst several lenders and brokers have been forced to exit due failing the criteria or because they can be profitable under the new regulation.
The disappearance of payday loan brokers has been key to reduce the number of complaints. Previously, there were hundreds of brokers sites appearing on Google pretending to be lenders and they would collect customer information on their websites and pass on their details to several third parties, with some taking upfront fees of up to £79.99. The removal of these introducers has been key to clean up the payday loans reputation and restore consumer confidence.
Google bans payday loan adverts
To put further pressure on the industry, Google made an announcement in May 2016 that they will be banning all paid adverts on their search engine for all payday loans related products. This includes any loan term that is less than 60 days or has an APR higher than 36 per cent.
This change will impact hundreds of payday loan lenders and introducers that pay for adverts on Google to generate leads. Instead, they will have to fight for the very limited positions on Google’s organic search listings using search engine optimisation, which can be tough to break into for new and old entrants.
The future of the industry
The measures that have been introduced are effectively removing the least-compliant players from the payday industry, and keeping the most responsible in the game and creating a barrier to entry. Further rules may change the use of Continuous Payment Authority which is used by lenders to make automatic collections on a large scale, and this might be replaced by a simple direct debit to empower the customer.
Other changes involve loan companies not just offering payday loans but also 3, 6, and 12 month loans like those currently being advertised by Wonga and offered by Mr Lender here. By offering longer-term finance and giving customers the opportunity to repay early, it aims to remove the pressure on an individual’s finances at the end of the month and give them time to get their finances on track.
The FCA has also emphasised the importance of comparison sites to allow borrowers to compare the different costs and options before applying.