July 2014 is likely to be a watershed moment in the payday loan sector, as a raft of new rules take effect. The aim is to tidy up the industry which has been allowed to grow at a staggering rate without clear overarching regulation.
Financial Conduct Authority (FCA)
Having taken over responsibility for regulating the payday loan space in April 2014, the FCA has been quick to implement a number of policies to help protect customers.
The rules include preventing payday lenders from rolling over a customer loan more than twice. A rollover is the ability for a loan to be further extended at a given point in time, normally when it is due. It also normally attracts a new fee and further interest.
It is rollovers that have been seen by many as a cause of concern, as it is believed that some payday lenders have made it standard policy to rollover a loan in order to attract more fees and income.
By restricting the number of rollovers to two, the FCA has removed a large ability for payday lenders to earn and this in itself has caused many payday lenders to come out of the marketplace.
Further to this, if the customer does rollover that third time, they will have their interest and fees frozen so they cannot accumulate any further debt.
The UK Government has also requested that the FCA publish a new structure whereby customers have their total cost of credit capped. This is due shortly.
In addition to rollovers, lenders are compelled to:
- add financial health warnings on emails, websites and in any marketing messages;
- only try and use Continuous Payment Authority (CPA) a maximum of twice to automatically try and reclaim funds direct from customers bank accounts;
- tighter and more comprehensive affordability checks to make sure customers are able to repay loans.
Competition and Markets Authority (CMA)
The replacement body of the Competition Commission has launched it preliminary findings into its review of the payday loan sector after a super-complaint was brought against the industry as a whole by the Office of Fair Trading (OFT).
It has found that without am independent and impartial price comparison service, consumers are not able to find the best deals. This in itself is costing consumers an extra £30- £60 a year. They estimate that overall, a price comparison service could save the UK consumer more than £45 million a year.
They also suggest a few things to support the work of the FCA. These include:
- customers should be made more aware of the true cost of borrowing, particularly in cases where repayments are not made in full or on time;
- greater clarity of the role of lead generation companies in the loan process.
Advertising Standard Authority (ASA)
The ASA have been more rigorous in the banning of payday loan adverts on TV and in print in the last few months. They have also suggested that TV advertising of payday loans needs to be revisited to ensure vulnerable people are protected. Some quarters are suggesting there needs to be a 9pm watershed for payday adverts to protect children.
New Information Sharing Service
The industry itself has also taken a major step forward to help combat customers taking out multiple loans from multiple providers in a short space of time which opens them up to potentially a large amount of debt and charges. This was one of the major concerns of both the FCA and CMA. Until now, it was very difficult to have real time access of borrower behaviour. This made it easy for customers to apply for several loans at the same time as, when credit checks were carried out, none of their other applications would appear on their records for a few weeks.
This new service called MODA provides near real time access with updates made every 15 minutes, so it will be easier to spot customers trying to borrow across multiple lenders.
Wonga are one lender that has always suggested the borrowers should not all labelled as vulnerable people, as MPs have suggested in the past. To highlight their own customer base, Wonga have recently launched OpenWonga with the aim to provide a clearer picture of the industry and its customers.
It is hoped that all of these messages will help to clean up an industry which has come under a huge amount of scrutiny in recent years.
Roger Peters is a South African expat living in London who spends some of his free time writing finance articles for a number of websites.