The FCA is flexing its regulatory muscles and enacting tough new rules for UK’s payday lenders. Let’s take a close look at how these changes may affect your finances.
On 1 April 2016, the Financial Conduct Authority, or FCA, took over regulation of the consumer credit market, including payday lending, from the Office of Fair Trading. One of the FCA’s primary agendas is to crackdown on “high cost, short-term credit” lenders, including payday loan lenders.
There are two goals for the new FCA regulations: to ensure that firms do not lend money to those who cannot afford to repay and to increase borrower awareness of the risks and costs associated with payday loans. So, exactly what changes is the FCA making?
Putting a Limit on Rollovers
Currently, UK borrowers can typically rollover their payday loan until the next month or pay period if they cannot afford the repayment. While this provides borrowers with added flexibility, it can quickly turn what was supposed to be a short-term financial solution into substantial long-term debt.
In most cases, a rollover means a borrower’s loan balance is extended by a month, with rollover fees and extra interest added to the final sum. When borrowers roll over a loan, many times they must pay the interest charges in advance, but these can sometimes be rolled over as well.
According to new FCA regulations, however, individuals will only be able to roll over a loan twice before their balance becomes due, protecting them from spiraling debt while still providing them with some flexibility to extend their loans under certain circumstances. These regulations go above and beyond the guidelines set forth in the Good Practice Charter, which was established in 2012 and set the limit of rollovers for one individual to three.
Regulating Continuous Payment Authority Attempts
The majority of payday lenders collect payments via a continuous payment authority, which is simply a way for creditors to take money from bank accounts on any date and in any amount they wish. This is an important change as lenders are now forced to let borrowers know when they are going to take a payment and how much the payment amount will be.
Using continuous payment authorities, or CPAs, can be a convenient way to pay your bills, as the money is automatically deducted and can help you avoid hefty late payment or default charges. However, claims of payday lenders taking money from the accounts of their customers without warning have caused growing concern amongst payday loan borrowers.
It is easy to see how this can easily cause problems for Britons. When money is taken out before other bills have been paid, it causes borrowers to default on other, more pressing debts, such as mortgage, rent, utilities, and council tax. This leads to bank charges, late charges, and credit damage.
Under the FCA’s new rules, payday lenders are also only limited to two failed continuous payment authority attempts, meaning they cannot keep trying to withdraw payment from consumers when the funds are not available. Instead, they must contact customers to find out about their situation and try to collect payment. That being said, the limit resets if consumers decide to roll over or refinance their loan and pay the amount they currently owe.
Banning Partial Continuous Payment Authority Payments
In addition to limiting the number of times payday lenders may try to collect a payment via continuous payment authority, lenders are also now limited on the amount they are allowed to collect. As of April 1st, payday lenders are now only able to collect a payment using continuous payment authority if consumers have enough money in their bank accounts to completely cover what is owed to them. In other words, lenders can no longer take partial payments.
This provides consumers with greater control as lenders are no longer allowed to deplete their accounts if they do not have the funds to repay their payday loan debts in full. Furthermore, if consumers have insufficient funds to cover the amount owed, lenders are only allowed to try to automatically collect payment twice.
Meanwhile, consumers are still able to make lesser payments themselves in order to reduce their debt. Consumers can also give their consent for lenders to take a different amount from their bank account.
Implementing a New Risk Warning
All payday lenders must now also clearly display a risk warning on all of their electronic communications. As of July 1, 2016, a risk warning must also be displayed within all “non-electronic media.”
Providing Debt Help Information
Payday loan companies must now provide consumers with information regarding where they can receive free debt advice before they roll over or refinance a payday loan. Consumers will now be pointed to an information sheet on the FCA website that only includes free debt advice providers.
Due to the massive wave of complaints regarding the payday loan industry, the FCA was forced to step in and assume regulation of the industry from the OFT, resulting in increased regulation for payday lenders and major advantages for consumers.