A Guide to the Effects of Regulation on Payday Loans

What have been the effects of regulation on payday loans by the FCA? Has it made it safer for borrowers, and is payday loan debt less of a problem than before? Discover the full story, based on the FCA’s review released Summer 2017, brought to you by Cashfloat.co.uk.


When the FCA placed heavy regulations on the payday loan industry, many people breathed a sigh of relief. Now, borrowers would be protected and payday lenders would be forced to treat them fairly and with understanding. The FCA promised to carry out a review two years later, to see if the effects of regulation on payday loans are positive. They will also decide whether to raise or lower the caps that are in place.

Table of Contents

Ch. 1 – Who are the People who Need to Borrow Payday Loans? Ch. 7 – How the Payday Lending Market Size has Changed
Ch. 2 – Are Payday Loans Cheaper Post-FCA Regulations? Ch. 8 – Growth of instalment loans instead of payday loans
Ch. 3 – Borrowers are coping much better with the repayments Ch. 9 – Why are people being declined?
Ch. 4 – Is there an increased awareness of payday loan trap Ch. 10 – What Declined Applicants Do Next
Ch. 5 – What transparency changes have been made to the market? Ch. 11 – What are Other FCA Caps on the HCSTC Market besides Payday Loans?
Ch. 6 – Size of the market: Lenders
Conclusion A – Why the FCA Will Not Raise the Cost Caps on Payday Loans Conclusion B – Should the FCA Tighten the Payday Loan Cap?

FCA’s Regulation Review

Now, two-and-a-half years later, the investigations are complete and the review has been released. The FCA have decided to keep the cost caps at the current level, committing to a further review in 2020. But just how different is the payday loans market of today?

In this article, we’ll discuss:
  • The effects of regulation on payday loans by the FCA, focusing on how it has changed from 2014 to 2016.
  • What the FCA’s concerns were at the time of setting the cost caps
  • Whether these fears played out or not
  • The FCA’s decision to keep the current caps in place. We’ll explore why they are not being raised or lowered.

We will be exploring many different aspects of the UK online loans market, looking at how each one has changed since 2014. Here is a table of contents of the articles in the series: pick one, and enjoy!

To understand the reasons behind the FCA’s regulations we need to first take a look at what the payday loan industry used to be like. Was it really so bad?


What Was Wrong with the Payday Loan Market?

In 2013, the payday loan industry was, on the whole, failing to meet the basic standards set for them.

Until the FCA took over on 1st April 2014, the Office of Fair Trading (OFT) were in charge of regulating the short term credit industry. In a report released in March 2013, the OFT list several problems they found with many payday lenders.

There was a tremendous amount of competition, meaning that lenders were reluctant to turn applicants down because then they would just go to a competitor. Additionally, 50% of lenders’ revenues were coming from loans that were refinanced or rolled over. These facts combined resulted in lenders failing to conduct adequate affordability assessments and ensuring that borrowers should be able to repay – because they make more profit when they don’t.


The OFT also found that lenders were emphasising easy and fast access to instant pay day loans in order to draw in customers, without making the costs and risks clear enough to applicants. There was also not enough understanding or forbearance for borrowers who were struggling with repayments.

Furthermore, there were overly aggressive debt collection practices in place that were far below the official standards lenders were meant to follow.

All in all, the market was full of problems and many people were suffering as a result. Debt charities were seeing more and more calls each day from people struggling with enormous amounts of payday loan debt. It was decided that strong action must be taken. The OFT closed its doors on 1st April 2014, and the Financial Conduct Authority took over.


The Effects of Regulation on Payday Loans by the FCA

When the FCA took over the regulation of the consumer credit industry, it had some difficult decisions to make. They wanted to limit the market to ensure the safety of borrowers, but without eliminating the market completely.

Attempting to limit the payday loan market can have disastrous results if done wrong. Too lenient, and borrowers will still find themselves heavily in debt from loans they couldn’t afford. Too strict and lenders will be unable to make a profit and go out of business, leaving thousands of people without a short term credit option.


2015 Payday Loan Regulations

After much thought and consideration, the following regulations were proposed:

  • A cap of 0.8% on the daily interest rate. This means that a £100 loan over 30 days can cost up to £24 in interest.
  • A maximum charge of £15 for missed payments.
  • No more than 2 rollovers are allowed per loan
  • A cap of 100% of the loan amount of the total a borrower will have to repay, including all interest rates and charges. This particular point is a hugely effective safety net for borrowers who cannot repay their loan for a long period of time, as the debt can’t just endlessly pile up.

Additionally, lenders would be required to perform adequate affordability assessments and credit checks to ensure that the applicant can afford the loan, and that it is right for their current situation.

All of the above regulations came in action on 2nd January 2015, together with the commitment to review the situation of the HCSTC market in 2017. Now, two and a half years later, what has the review found? Are the effects of regulation on payday loans positive? Should the cap be loosened, or tightened?

 Select the relevant title from the table of contents above, and find out more about the effects of regulation on payday loans!


Conclusion

At Cashfloat, we’re constantly trying to do more to help UK citizens. Our discovery of the plight of poorly paid NHS nurses who need payday loans to meet their basic needs (read this article about our research in the Mirror) is just one example. We don’t just offer loans. We do our best to ease the situation in the long run too. In addition, we offer early repayment with no extra charge, allowing our borrowers to save on interest and make their loans easier to repay. If someone is struggling to repay, we will happily rearrange their repayment plan to something more feasible.

The FCA review (page 23) also revealed that customers are not looking only at the price of a payday loan when they choose who to apply to, but are instead looking at other features such as flexibility, early repayment, and speedy decisions. At Cashfloat, anything that makes your life easier is our priority. We are determined to keep fine-tuning our advanced technology to provide better and safer payday loans.

As a moral and responsible no guarantor quick loans lender, Cashfloat are delighted at the positive tone of the review, and continue to provide premium payday loans in a safer market than ever.


Written by: Sarah Connelly
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