The Financial Conduct Authority (FCA) was founded on the 1st April 2013.
The FCA is the regulatory body for financial services, with a specific interest in regulation of conduct.
What existed before the Financial Conduct Authority?
Prior to the creation of the FCA, regulation of the financial industry was carried out by the Financial Services Authority (FSA) and the Office of Fair Trading (OFT).
The Office of Fair Trading
The Office of Fair Trading, sometimes known as the Office of Fair Trade and shortened to OFT, covered the regulation of consumer credit specifically.
The role of the OFT was to encourage competition, ensure financial businesses were acting fairly and to protect consumers from scams and cartels.
In 2012, the Office of Fair Trading launched an investigation into the payday loans industry.
The study lasted for over a year and resulted in 50 companies receiving warnings about their behaviour.
As a result of the OFT investigation, a number of lenders had their licenses revoked and were shut down.
A further 14 of the investigated lenders had chosen to cease trading by July 2013.
The OFT existed from 1973 to 1st April 2014. When the organisation was disbanded its responsibilities were shared between various other organisations including the FCA.
The Financial Services Authority
The FSA was in operation for more than a decade, from 1997 until 2013.
This organisation had limited resources to work with and not enough attention could be given to all of the areas of regulation that should have been covered by the FSA.
As a result, many financial firms perhaps enjoyed more freedom than they ideally should have.
In 2010, preceding the closure of the FSA, the Chancellor of the Exchequer determined that further regulatory reform was needed.
Following the royal assent of the Financial Services Act 2012, which came into force on 1st April 2013, the FSA was abolished. The roles previously carried out by the FSA were split between the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA).
The PRA took on the role of regulating banks, building societies, insurers, credit unions and investment firms. This role involves imposing certain standards to limit risks for consumers. The PRA is a subsidiary of the Bank of England.
The FCA, on the other hand, is the regulator of retailers, wholesalers and financial markets, as well as all other entities not covered by the PRA.
It is the FCA that now regulates the payday loan market.
What role does the FCA play?
The Financial Conduct Authority is accountable to the HM Treasury and Parliament. The FCA and PRA work very closely together.
The role of the FCA is to protect consumers, enhance the integrity of the UK financial industry and promote competition within financial industries.
The Financial Conduct Authority can control the marketing of financial products, such as payday loans and short-term loans, by setting minimum standards.
Their rules dictate how products can be advertised and what pieces of information need to be clearly communicated to consumers.
The FCA also controls industry regulation and restrictions, alongside managing the register of authorised financial firms.
The FCA: a necessity for the payday loan industry
Throughout the period when the financial industry was regulated by the Financial Services Authority, payday loan companies grew at an unprecedented rate.
Many lenders were found to be using unfair and irresponsible practices, which included providing loans to consumers that could not afford them. Some invented debt recovery companies to chase down any missed payments.
In addition to the payday loan scandals, the Financial Services Authority oversaw the PPI scandal and the UK banking crisis.
The FSA was not doing enough to regulate the financial industry
With restrictive budget limitations and a too-broad scope, the Financial Services Authority could not successfully regulate the industry. Martin Wheatley, the former CEO of the Financial Conduct Authority, accredited the failings of the FSA to the variety of roles that the organisation had to cover.
Wheatley was quoted as saying: “One of the problems [was that] the FSA had to worry about the safety and soundness of institutions as well as worrying about whether they were treating their customers correctly.”
Wheatley explained that the FSA had to be so focused on which big institution would be the next to fail, amidst the banking crisis, that no time could be spent looking into issues of conduct.
Alternative solutions had to be created, rendering the FSA redundant.
The Financial Conduct Authority was formed to work for consumer protection, covering specifically (as the name suggests) business and organisation conduct.
The FCA works closely with consumer groups, to represent their needs and opinions.
What are the regulatory changes in the payday loan industry?
Since its creation in 2013, the Financial Conduct Authority has made significant changes to the payday loan industry.
Most lenders take repayments using a Continuous Payment Authority, which provides access to a borrower’s bank account to take the money that is owed without a separate agreement for each repayment.
Borrowers can cancel a CPA at any time, but should offer an alternative form of payment.
The FCA now ensures that if money is not available, only two unsuccessful attempts to claim the repayment can be made. This protects consumers from having money taken from their accounts when they are really struggling financially, and might otherwise be unable to afford essential bills.
Since 1st July 2014, rollover restrictions have ensured that loans cannot be rolled over, or extended more than twice. Lenders need to provide information to consumers, helping them to access free debt advice, before rolling over the loan.
Caps on payday lending charges
- Default charges are now capped at £15
- Daily interest rates are capped at 0.8% per day
- Total loan costs are capped at double the amount that was originally borrowed
Prominent risk warnings
The FCA has ruled that all advertisements for short-term, high-interest loans must include a prominent risk warning:
“Warning: late repayment can cause you serious money problems…”
The Financial Services Register
As well as regulating the industry by introducing new rules and monitoring the behaviour of lenders, the FCA operates and maintains the Financial Services Register. This register lists all companies and individuals that are regulated by the FCA or PRA.
The FCA forced all payday lenders to reapply for authorisation, even if they had previously been authorised by the Office of Fair Trading. In the meantime, they ran an interim register.
Enforced re-authorisation gave the Financial Conduct Authority a chance to sift through the existing registered firms, in order to check that they all met the newer and stricter regulations.
Many companies that previously provided short-term loans ceased trading after the FCA took the reins.
Some were refused authorisation, having not met the FCA standards, whilst many others chose to leave the market (or were forced to do so) following the introduction of new caps and regulations.
Consumers can search the register before taking out a payday loan.
All registered and authorised lenders can be found on the Financial Services Register, with details that include contact information and trading names.
Unauthorised lenders also feature on the Financial Services Register, if the FCA has been made aware of their existence. The register lists firms that have been providing regulated products or services without authorisation or have deliberately been running scams.
Consumers should check the Financial Services Register before taking out any regulated financial product, including short-term and payday loans.
Any individuals that are unhappy with the service that they have received from a registered and authorised lender, can contact the Financial Ombudsman for advice, information and support. Consumers can also contact the Ombudsman if they are concerned that they have been dealing with an unauthorised lender.
The future of the FCA
More than 50,000 firms come under the remit of the FCA. The payday loan industry will continue to be closely regulated.
As the industry evolves, the FCA plans to pay particular attention to the risks and rewards of technological innovation. New technologies enable more stringent affordability assessments and more responsive lending options but also bring concerns about privacy and data security.
The Financial Conduct Authority will continue to evolve to meet the needs of consumers.
Cash Lady supports the work of the FCA and all initiatives to make the short-term loan industry fairer and more responsible.
Consumers can find Cash Lady (part of the Money Gap Group) on the Financial Services Register.