The British payday loans industry has grown immensely in the past decade, particularly between the years of 2006 and 2012. With the emergence of the short term lending industry, it is critical for industry consumers to understand their rights and entitlements as well as the regulations around, so they can make better-informed decisions and choices regarding their finances. It may be the case that a particular type of loan, such as an emergency loan is more suitable than a payday loan or perhaps borrowing from friends and family is a better option; being aware of the available information can help inform an applicant’s final decision.
Before the establishment of the Financial Conduct Authority (FCA) in 2014, regulations on the industry were less strict. New industry regulations, introduced in April 2014, have helped protect British consumers and lenders alike, with these very regulations said to have been a factor in the lead up to Wonga’s recent collapse.
What do Regulations Mean for Borrowers and Lenders?
Since 2006, the Office of Fair Trading (OFT) evaluated lenders before granting them official registration. The OFT publishes the list of registered lenders so the British public can learn about a company before selecting a lender. you can visit the FCA’s Financial Services Register to find out whether or not a lender is regulated by and compliant with the FCA. Among many other regulations, the FCA created comprehensive affordability checks to ensure a borrower can afford a loan. Additionally, the FCA requires payday lenders to report data in real-time. This requirement is in the process of being implemented.
What Regulations Did the FCA Introduce?
Part of the regulations introduced included price caps and price regulations in order to help make these High Cost Short Term (HCST) loans more manageable for borrowers. Amongst various other requirements and regulations, the following regulations came fully into effect on January 2, 2015:
- Daily Interest Cap – The FCA capped daily fees and interest to 0.8% of principal. This cap also applies to refinanced loans
- Additional Fees Cap – Default fees for struggling borrowers cannot exceed £15
- Total Loan Costs – 100% total cost cap on loan. If a borrower establishes a long-term payment plan or defaults on their plan, the interest cannot exceed 100% of their principal capital borrowed
- Repeat Borrowers – The regulations listed above all apply to repeat borrowing
- Rollovers Capped – The number of rollovers is limited to two per loan
- Restrictions of Continuous Payment Authorities – Restrict the number of times a Continuous Payment Authority (CPA) can be used to two. A CPA is a when a consumer grants a company permission to withdraw money automatically from an account when the company feels it is owed. Consumers are notified via email before money is drawn from their account
How Does the UK Regulate Payday Advertising?
In addition to the rules, restrictions and regulations placed upon the payday and short term loan products, there have also been a number of regulations placed upon the advertising of them too. This happened as a result of various people claiming that the advertising of these loans was misleading and too enticing to those who may not be able to repay their debts.
In 2004, the Consumer Credit Regulations announced that short-term lenders must be accurate in how they represent their product to consumers. A firm must honestly divulge that they cannot lend to every consumer. Hence, the Competition and Markets Authority (CMA) Investigation into the Payday industry in 2015 announced that lenders must prominently display price comparisons on their website. Lenders must also display clear risk warnings and information about debt advice on all adverts.
This has meant that the way in which payday and short term lenders can advertise on television, radio, billboards and even Google (organic and Paid positions) has greatly changed. For example, on the websites of online direct lenders, it is a requirement to display representative examples of loans and risk warning with regards to what may happen if a borrower fails to repay.
How to Choose a Payday Lender
New short-term loans regulations make it easier for consumers to consider their options and choose wisely. It is now simple for consumers to compare APR and payment plans across competitors. Consumers can also easily calculate their payment plan and discuss their options with a service provider over the phone.
There are however, two main ways in which you may choose the precise HCST loan product you take out:
Loan Brokers – A broker is a person or company whose job is to find you the best product for your needs and requirements. In the case of short term and payday-type loans, this could be a company on the high street or more often, an online broker of loans. These brokers (also referred to by the FCA as ‘Appointed Representatives,’ work to utilise the data you provide to match you with options for which loan to apply for. They then send you to the lender who will carry out their required checks before finding the loan.
Direct Lenders – A Direct Lender is a company which lends directly to the consumer. Direct lenders must be authorised and regulated by the FCA to be legally allowed to lend. This is designed to avoid consumers having to apply with unscrupulous lenders as was the case previously. Direct lenders are the company to which the borrower will need to repay their debt. They should also be the first point of contact for the borrower should they default or be late with their payments.
There are also various ways in which you may come across the lender you ultimately complete an application with such as:
- Online (via Google, Bing, Yahoo or other search engines)
- High Street providers