If you’re a payday lender or broker in the UK, you probably feel like you are being hit from every angle in terms of press and regulation. Since the Financial Conduct Authority took control of the sector in January 2015, there have been significant changes to the industry that was once worth £2 billion.
The UK’s payday loan industry is easily one of the most controversial. Amongst several detractors include Archbishop of Canterbury, Justin Welby and Labour MP, Stella Creasy who have heavily criticised payday firms for their high interest rates.
In addition, payday lenders have come under fire for increasing consumer debt in the UK and granting loans without sufficient affordability checks, something that has increased complaints by 22% in the last year (The Guardian).
The landscape in the US is no different, with councils calling out for more regulation and Google recently taking a stand to remove payday loan ads from their search engine.
When the FCA took over from the Office of Fair Trading, their first spell of changes included a price cap that lenders could charge to 0.8% per day and no more than £124 charged per £100 borrowed. Previously, there had been no limit to what lenders could charge and whilst 1% per day was common, some companies charged well above this leading to rates of APR up to 6,000%.
Additional changes included a maximum one-off default fee of £15, which was previously unlimited and also a limit to two rollovers per customer (also previously unlimited).
The changes were designed to cut the margins of lenders, causing them to be more selective with who they lent to. Firms that failed to carry out sufficient checks were fined hugely, including payday giant Wonga who were billed over £200 million.
New and existing firms were required to apply for FCA authorisation in order to provide consumer credit in the UK. Companies were given interim permission if they had previously traded and then official authorisation was granted in Q1 of 2016 which rewarded the most responsible lenders including Quickquid, Satsuma and Uncle Buck short term loans. Those that did not meet the grade were forced to exit.
Companies now looking to apply for authorisation must submit full business plans and provide a long list of requirements to prove that they are fit to offer their services. The process typically takes a minimum of 6 months to complete.
3 Month Model
The FCA want to move consumers and lenders away from the payday model, which involves borrowing a few hundred pounds and repaying the loan and interest on your next payday. To avoid customers being reliant on payday to payday, they now require lenders to offer a minimum of a 3-month loan, with the option to repay early.
The intention of the FCA is to remove and depower the payday sector altogether with their vision of having only four main lenders left to service the demand.