The FCA and Payday Loans

Looking for payday loans? UK lenders have some tough new rules to follow

Gone are the days when UK payday lenders could apply endless interest charges and penalties to borrowers when they failed to repay on time. The Financial Conduct Authority (FCA) put an end to disreputable practices such as these a few years back. Thankfully, customers are now protected against irresponsible lending and they're flooding back to the industry in droves.

If you want to know more about how the FCA protects consumers borrowing short-term credit, here's our guide to the role that the FCA plays in the payday loans industry.

What is the FCA?

The Financial Conduct Authority is the organisation that regulates the conduct of nearly 60,000 financial services firms in the UK to ensure that the entire industry works well for consumers, businesses and the economy.

The FCA was set up in April 2013, before which the Financial Services Authority fulfilled a similar function. The FCA says that it plays a vital role in making sure the UK retains its reputation as a 'global financial hub.' It is funded through the charges it applies to the firms on which it imposes FCA regulations.

Not only does the FCA play an important role in protecting the reputation of the financial market and financial services industry in the UK, it also works to uphold the values of competition within these industries to help consumers access the very best products without being ripped off.

How does the FCA regulate UK payday lenders?

If you're on the lookout for a payday loan, you may be feeling a little cautious due to the bad press the market has received in the past. It's true that some payday loan providers abused borrower's vulnerabilities and made money from extremely high and uncapped interest charges and penalty fees.

Something had to change...

Unfortunately, the entire payday loans market earned a reputation for being ruthless and expensive, so much so, that it was clear the FCA had to step in to clean many of the businesses up. Thankfully, the new regulations had a huge impact and there is now real choice for consumers who want to take out a payday loan with a responsible online lender in the UK.

What are the interest and price caps applied to quick loan UK lenders?

The FCA decided to take an in-depth look into the market and the problems that were occurring for consumers before they introduced their new price cap and regulations. FCA officials looked at the credit records belonging to over 4.6 million people to find out what people did if they were turned down for payday loans. They also analysed a number of payday loan lenders and millions of loans to find out what affect the price cap would have on the industry and they also talked to regulatory bodies that had introduced similar caps in other countries. This all painted a clear picture for the FCA, allowing them to introduce a balanced set of regulations, limits and caps that work for everyone.

The changes the FCA brought in came into force from 2015 and formed a three pronged strategy on removing payday loan scams, unfair fees and high interest charges.

The three-pronged strategy on unfair charges:

1. The FCA limited the interest rates charged to a maximum of 0.8 per cent of the value of the loan per day.
2. They then implemented a rule that limited the penalties applied for non-payment to £15.
3. Finally, the FCA applied a cap of 100 per cent of loan value to the cost of all charges and fees to protect consumers from ever having to pay more than double what they borrowed, whatever their circumstances.

What impact have the FCA regulations had on UK payday lenders?

Well, this all depends on your perspective. A number of payday lenders went under as a result of the new cap. This was due to a drop in customer numbers, a fall in the amount of money firms could make from each borrower, and an increase in the charges they incurred when consumers complained about their irresponsible lending practices.

However, the FCA's measures go a very long way to ensure that the payday loans industry now works for consumers, offering them a useful service in the form of affordable loans that meet a genuine demand. FCA-regulated quick loan uk lenders and fintech firms now want to increase their exposure to borrowers who can afford the terms of the loan and will not default.

While the number of payday loans UK lenders has fallen, as a result of the regulation changes, the number of people taking out payday loans is increasing. This suggests the payday loan lenders now operating have made significant headway in repairing the industry's reputation with responsible lending practices.

Can the FCA help me to find the best payday loans UK lenders have to offer?

Yes, the interest price cap and limits the FCA has brought in have meant the end for a number of the payday lenders who were operating irresponsibly. Therefore, by checking that your latest lender is FCA-authorised and regulated, you can minimise the risk of taking out a loan with a poor quality lender.

What is a responsible lender?

In order to be officially classed as a responsible lender, you need to meet certain criteria set out by the FCA.

The FCA states: 'Applicants have to meet a range of requirements for registration before we allow them to operate in the market. We review their business plans, risks, budgets, resources, systems, controls and whether key staff have the necessary qualifications, experience and ability to carry out their roles effectively. They must meet these requirements before we will authorise or register them.'

FCA responsible loan lenders criteria:

Creditworthiness

The FCA says: ‘A firm must undertake a reasonable assessment of the creditworthiness of a customer before entering into a regulated credit agreement; or significantly increasing the amount of credit provided under a regulated credit agreement; or significantly increasing a credit limit for running-account credit under a regulated credit agreement.’

The Customer's Income and Expenditure

The FCA rules that payday loan lender firms must take reasonable steps to ensure they are aware of the borrower's income and expenditure before offering them credit or increasing their credit limit.

The FCA regulations state that the above factors need to be taken into account and considered alongside the following: the type of credit taken out; the amount of the credit or the credit limit; the duration (or likely duration) of the credit; the frequency of the repayments; the amounts of the repayments; the total amount payable; the total charge for credit and the annual percentage rate of charge.

There are many other rules set out by the FCA that must be followed in order for a provider of loans or a fintech to be classed as a responsible lender. These regulations are based around lending to people using guarantors and those borrowing in pairs or for small business purposes, for example.

Although the rules are complex, the FCA make it very clear that they expect the very best conduct from the lenders they regulate and will reward those who comply with price cap regulations and affordability check rules with the credit they deserve.

And the impact on borrowers is…?

The overall impact on borrowers of the FCA price cap and regulations has been overwhelmingly positive. Although a percentage of consumers able to access payday loans has fallen as a result of the new regulations, those who do not qualify under new criteria should not be taking out short-term loans for their own financial wellbeing.

At the time of introducing the caps on interest charges and fees, way back in 2014, the FCA stated that it had the 'balance right'. It claimed that the caps would enable the industry to continue, while introducing 'substantial protections' for consumers.

Before the latest FCA cap was brought in, many borrowers who found themselves with several unmanageable payday loans, said their lender did not carry out sufficient checks to see if they could afford the loans before granting them funding. Now, such complaints are fewer and, providing borrowers look for FCA-authorised lenders who don't court bad credit applications, consumers should find that the right decision is being made about whether they should be taking out a payday loan or not.

As well as better affordability and credit checks, lenders are now offering more flexible repayment options, such as an Instalment loans, which can be repaid over the course of a few months, rather than in a single lump sum on the borrower's next payday. This can help relieve the pressure on consumers and allow them to spread the cost of a loan, removing some of the pressures that payday loans previously created.

The FCA published some new facts and figures about payday loan borrowers following the introduction of the caps and limits. They found that the lending levels are far lower than they were in 2013, before the caps were introduced. They also found that the average being repaid by borrowers totaled 1.65 per cent of the amount they borrowed, so well within the limits imposed, while the cost of borrowing has also remained stable in recent years and is lower than before the new regulation came into force.

Here at Moneyboat, we welcome the new fairer world of short-term lending and pride ourselves on our responsible lending credentials.