We’ll start with a quick recap of the reality of high cost short term credit supply and demand before the new regulation. Demand was soaring and many lenders were created as a result. The 2008 crunch led to a lot of people not having enough cash to meet expenses, needs and spending habits. Job cuts and a reduction in wages led to a difficulty in sustaining prior lifestyles. A payday loan was a good alternative for many people who could not get loans elsewhere.
The trouble was that too many people lived beyond their means, some even relying on payday loans to sustain their living. Too many people were defaulting on loans, and getting into a spiral of debts. The OFT and later on the Financial Conduct Authority (FCA) realized something had to be done to stop this. Consequently, High cost short term loan companies were imposed with strict new regulation and new lending rules introducing affordability checks and socially responsible practices.
What were the aims of the new regulation introduced in January 2015?
- Enforcing Affordability Checks – Caps were introduced on default fees, arrangements fees and interest rates. Protection for borrowers was introduced in the form of limiting the dates and number of times a lender can access a borrowers bank account. Loans could not be rolled over more than twice.
- Clear and transparent borrowing: Borrower need to be fully informed of the product they are signing up to, costs, and implication of miss payments. Customers need to be treated fairly.
The new rules and regulation were strict and are meant to protect vulnerable customers and other customers from falling into a debt trap. Lenders and brokers alike needed to comply with new requirements which imposed warning messages that would refer customers to debt charities to help with solving financial problems.
In addition, the new regulation successfully managed to eliminate some bad practices that were prevalent in the broker space. More specifically this targeted the bad practice of charging unwarranted upfront fees where many customers were charged without consent or knowledge of what they are signing up to. This doesn’t mean all the work has been done. Still, the challenge of ongoing monitoring and regulation remains and that future challenge is a hefty task for the regulator given the number of companies involved and the size of the UK credit industry.
Companies such as ourselves are aware of their obligations and know that happy customers are the ones that get the product they were looking for. The message is clear; payday loans are not what they appeared to be two years ago, and you can use them in a much safer way for unexpected emergencies or expenses.