The payday loan industry had been growing up to 2013. But due to growing concern on tactics used by payday lenders, there came a time for action to be taken by the British government in order to regulate the industry. With the aim of creating a market that is fair, the FCA implemented a number of changes in the industry. In this article, we will be looking at how the FCA tackled the growing problem of unfair lending through stricter regulations and price caps.
Before The FCA Regulations
Between the years of 2008 and 2012, the high-cost short-term market was growing rapidly, approximately 10.2 million payday loans were taken out in 2012. This, therefore, presented a 35-50% increase when compared to the previous financial year. However, with a number of lenders on the high street as well as online there was very little being done to ensure the safety of consumers and the regulation of a number of firms operating within the industry.
The Beginning Of The FCA
The UK government set to replace the Financial Services Authority (FSA) with the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). The FCA operates under the jurisdiction of the Financial services act of 2012 that came into effect in April of 2013 following royal approval. This act created clear guidelines and gave significant power to the organisation for the regulation of 59,000 financial firms and services. The FCA was given the task to guarantee the fairness of the market for both lenders and borrowers with clear and concise regulations.
In order to fulfil their purpose, the FCA has three key aims that they follow:
- Protect Consumers
- Protect Financial Markets – To safeguard the stability of the British Economy
- Promote Competition – To better the market in the interest of the consumer
In order to achieve these aims, the FCA continues to work closely with customer groups and trade associations to ensure they are prioritising firms that pose the highest risk to the market or the best interest of borrowers when applying for financial alternatives such as payday or same day loans.
FCA Regulation
Following an investigation into numerous avenues such as surveys and analysing the credit records of 4.6 million people, the chief executive officer of the FCA Martin Wheatley had this to say when asked about the proposed regulations:
“There have been many strong and competing views to take into account, but I am confident we have found the right balance”
Following this, the FCA released an official document outlining the changes that would be implemented to improve the industry and its relationship with its customers. The first of these being an initial cost cap of 0.8% per day for new or ongoing loans.
The next regulation implemented was to make sure that all default fees did not exceed £15. This was beneficial for new and existing customer as it set about to protect those that continuously struggle to meet their repayments. This combined with 0.8% daily cap then helped ensure all repayment methods were kept fair and were in the best interest of the consumer.
The final cap that was put into effect was a total cost cap of 100% to protect the borrower from escalating debts. These changes set about to guarantee that borrowers did not pay back more in fees and interest than the amount borrowed. This change reduced the average amount paid back by lenders to an affordable amount.
The Effects Of These Regulations
One of the effects of the changes has resulted in reduced access to credit. There has also been a reduction in the number of firms offering access to payday loans, from over 100 in 2013 to just 88 in 2018. In addition to this, the regulations have also seen the loan acceptance rate fall sharply from around 50% to around 30% following these changes. The number of loans being taken out has fallen to nearly half of the 10 million taken out in 2013 before any action was taken.
As the industry adjusts to the changes, there is no question that it has become fairer for consumers and aided the competitiveness of the industry. The FCA has successfully achieved its three key aims to increase competition and create a fair market for lenders and borrowers.
