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Home > Blog > An update on the regulation of the payday loan industry
Jul 21, 2018
An update on the regulation of the payday loan industry

paydayloansMany Britons, including Labour’s Stella Creasy, have become increasingly concerned over the explosive growth of the UK’s payday loan industry, calling it grossly “under regulated.” However, it has become quite clear that the regulatory transition from the Office of Fair Trading to the Financial Conduct Authority in April of this year will result in stricter regulation of this largely unregulated industry. In fact, the FCA recently announced new caps set to come into effect in January 2017, which will limit the amount payday lenders can charge their financially distressed borrowers.

The Current State of Payday Loan Regulation

As you may already know, the amount of money owed by payday loan borrowers grows month by month as they are charged additional fees and interest if they are unable to pay off the loan in full by the agreed upon date.

Unfortunately, due to the fact that payday loans attract financially strapped borrowers in need of instant money and are designed to be paid off within a month, many borrowers don’t realise just how much their loan balances will continue to grow if they’re unable to pay off their loans within the first month.

Currently, there is no cap on how much a payday loan borrower can be charged for a loan. Today’s borrowers can rollover a loan an infinite number of times, and lenders can charge as much interest as they want. Therefore, a borrower can receive a £500 loan at an interest rate of 3,000 percent and rollover the loan eight times without any regulatory intervention.

Obviously, such a situation can have massive consequences for the borrower. However, thousands of people across the UK are finding themselves in similar situations, leading to insurmountable debt that is impossible to repay.

New FCA-Imposed Interest Caps

Payday lenders throughout Britain have been facing mounting scrutiny as of late for charging exorbitant fees and being responsible for driving households into a never-ending spiral of debt. For example, Wonga, the UK’s largest payday lender, charges an annual interest rate of nearly 6,000 percent.

However, this is set to change in January 2017 as the FCA announced an interest rate cap of 0.8 percent of the amount borrowed per day. Currently, payday loan firms are charging from one to two percent per day. Under the new rules set forth by the FCA, fixed default fees must also not exceed 15 pounds, and the overall cost of a payday loan cannot exceed the loan amount.

According to the FCA, the new caps will result in an estimated 42 percent loss in revenue for UK payday loan firms and an average annual savings of 193 pounds for borrowers.

Payday Loan Regulation: A Response to Growing Economic Concerns

With the 2017 general election looming on the horizon, politicians from every party are positioning themselves as advocates for low-income families and pressing for stricter regulations for the payday loan industry, hoping to gain the vote of the growing number of low-income families.

Last year, the UK’s Centre for Social Justice reported that approximately half of all payday loan borrowers had taken out a payday loan because they lacked access to any other form of credit.

The same report stated that the cost of living in the UK has risen by a staggering 25 percent in the last five years alone and real wages have fallen to 2003 levels, resulting in economic hardship for thousands of consumers and forcing cash-strapped individuals with nowhere to turn into the waiting arms of preying payday lenders.

Labour lawmaker John Mann stated that the new FCA regulations would “make a significant difference to those people reliant on payday lenders and bring some much needed regulation to this area of the financial services market.”

Impact of New Regulation on the Payday Loan Industry

The Consumer Finance Association, which is responsible for representing Britain’s payday lending industry, has contended that other countries, such as Germany and France, have unsuccessfully implemented similar caps, forcing borrowers to resort to illegal lenders.

According to Emily Reid of Hogan Lovells, an international law firm, bigger lenders are likely to view the new caps as an opportunity to weed out smaller competitors without the resources and ability to adapt their businesses according to the new FCA requirements.

When the FCA took over supervision of the payday loan industry in April, it said the new regulations may force up to 25 percent of today’s payday lenders to exit the market.

While these new caps are being heralded as a critical step in reigning in the UK’s payday lenders and helping the growing lower-class, the Citizen’s Advice Bureau has advocated the need for more short-term lending options, calling on banks to provide short-term loans in order to save consumers from resorting to payday lenders.

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