It’s a time of upheaval for the payday loans market in the UK. With the foundations of the high cost short term credit industry, it’s in something of a state of flux. Payday loans have been much in the news on consumer rights and responsibilities.
The result is many regulatory changes, investigations and criticisms. These are causing many brokers and lenders, to begin reviewing their business models. Key to this has been a review of lending policies and a new focus on affordability. They need to ensure consumers can afford to borrow a loan before the contract’s agreed.
The FCA and the payday loans market
Responsibility for the payday loans market is now with the Financial Conduct Authority (FCA). In April of this year it has come with a new approach to policing the way the sector is developing. The payday loans sector has experienced rapid growth over short periods of time.
Many believe the results of this are what has triggered the desire to overhaul aspects of the market. Especially those that may not have developed quite in the way that many would have liked.
Under the new guardianship of the FCA there is more power in the hands of the regulator to deliver bans. More so to those products that are harmful. Further to this it enables them to make rules governing the way that the payday loans market should operate.
Certain individuals and firms are now banned and fines imposed in specific situations. The FCA is working with other regulatory bodies too, including the Advertising Standards Agency. This is to ensure advertising used by the sector isn’t drawing consumers into loans they cannot afford.
Capping loan costs – will it work?
The costs of loans have also come under considerable scrutiny with changes underway. These include caps on fees and interest rates. The FCA is proposing to introduce these at the start of 2015. While this appears as a positive, consumer friendly move, some voices still express concern.
The fact this will prevent some peoples’ approval for loans is one reason for not capping these costs. Others include the risk this could lead to the use of illegal lenders and more costly borrowing. The result of which could see lenders go out of business.
It would not only decrease competition but also mean a rise in borrowing costs for those who can afford it. Wherever you stand on this issue there are some convincing arguments on both sides.
50,000 firms affected
The new regulatory framework for the payday loans market is going to be a significant change. It will impact the consumer credit market for decades. Furthermore it may affect £260 billion in outstanding debts.
The effect on market participants will be that some 50,000 firms will have to reevaluate their business models. This makes it an uncertain time for short term lending sector businesses.
Lenders must take note of new changes
Changes that lenders need to incorporate, include looking at how they originate loans. This is why affordability tests are becoming more important. A criticism of the payday loans sector is that it’s been responsible for lending to those who can’t afford to repay their loans.
Consumer assessments for affordability will be overhauled to deal with this. The way consumers make their payments are also under scrutiny. Prospective changes limit Continuous Payment Authority payments to two and prohibit part payment requests.
Limits to Rollovers are also likely to cap at two. There will also be new obligations on lenders to provide consumers with information about where they can get free debt advice. Periodic reporting requirements could also come into play, introducing extra responsibilities for lenders. More so when providing information on meeting regulatory requirements and product sales
Competition and Markets Authority investigation
A Payday lending market investigation is under way by the Competition and Markets Authority. There’ll be provisional decisions on potential changes at the end of September/start of October. Yet, the final report is not due to come out until the end of 2014 or the start of 2015.
So when – and how – this element of the market shake up is likely to take place will remain up in the air for some time yet.
A pause on lending?
No doubt there will be an impact on the unsettled nature of regulation in the short term credit market. Along with the criticism of the sector it may make lenders nervous. The result is that there’s a review of lending structures by those involved in short term lending.
This process is so new changes can take place. It includes the number of times a loan can roll over and the loan sizes that customers are offered. The lack of product choice for customers and decline in traffic quality has had a serious impact on loan volume and acquisition rates.
Some lenders are carrying out of the way that their businesses work. With this as the case we could start to see some in the sector pause their lending temporary. So great is the upheaval in the sector. This kind of hold on lending may well be necessary to ensure new FCA conditions are working.
As a result there may be new products that are both attractive to consumers and in line with the changes.