If you are looking at applying for short-term, high-cost credit (such as payday loans or personal loans), then it’s important to be aware who regulates the industry. That way, if something goes wrong during your application, you will be aware who to appeal to.
Most industries have regulators, which exist as a way to deal with major conflicts between customers and companies. For example, most shops were regulated by the Office of Fair Trading. If a shop treats a customer in a way that is agreed to be unfair, this situation will usually be passed to the competitions and markets authority. Short-term loans were, until recently, also overseen by the Office of Fair Trading. Recently, however, this has changed and the Financial Conduct Authority (FCA) has taken over.
This has been part of a large-scale enquiry into short-term credit in order to make sure that the industry is running in a way that does not take advantage of customers. Up until now, there weren’t that many restrictions with regards to how companies could run and some took a less fair-to-customers approach. The FCA will be taking a firmer grip on the reigns and have already made a series of major changes.
Who are the FCA?
The FCA was one of the organisations that were created as a result of the split of its predecessor, the Financial Services Authority (FSA). The FSA, which was established in the 1980s, was in charge of regulating all financial services, including banking, investments, stock exchanges, mortgage regulations and the majority of forms of credit.
Following the financial crisis in 2008, the FSA was split into a number of companies. This included the Prudential Regulation Authority, which took over the regulation of banks and major credit firms on a major level (and with regards to how they deal with each other, along with how their actions may affect the economy), the Money Advice Service, which took over the information and advisory aspect for consumers, and the FCA.
So the FCA has taken the same level of authority that the FSA previously had, but concentrates on finances aimed towards consumers. This includes personal loans, credit cards and insurance as well as bank accounts. It combines aspects of what the FSA used to do with aspects of what the OFT used to deal with. As a result of this, it takes a different approach and has more powers than the OFT did.
What makes the Financial Conduct Authority different?
The biggest difference is that the FCA can arrange for more funding, which means that they are not limited by budget in the way that the OFT used to be. If the FCA believes that something deserves further investigation, they can increase the budget to cover it.
They can do this either through penalties or through membership fees from the companies that they deal with. So, for example, if they need to look further into personal loans, they can make the companies that deal with personal loans fund the investigation.
This means that their scope is, in theory, limitless. Although, obviously, they have to have good reason to fuel an investigation like that. They also have further powers with regards to penalties that they can levy on firms.
What does the FCA do?
One of the main aims of the FCA is to maintain healthy competition between financial services firms and ensure they stick to the rules that have been set. They do this by conducting regular assessments for both small and large firms, as well as monitoring activity in the industry. They also aim to respond quickly and efficiently to any issues that may threaten the integrity of the financial services industry. The FCA also works to protect the firms themselves – working to ensure they protect themselves against criminal activity such as fraud and money laundering.
However, it is treating consumers fairly that is at the heart of the FCA’s activity. Financial service providers are regulated to make sure consumers are offered the most appropriate products for their needs. In order to do this, standards for financial advisors are also set by the FCA. These ensure that they’re properly trained to ensure they explain products effectively, so consumers can choose the product most suitable for them.
What penalties can the FCA issue?
The FCA has a number of powers at their disposal. They can remove a firm’s authorisation with immediate notice, preventing them from legally doing business. They can also suspend companies’ (or individuals within that company) licenses.
They also have the power to fine those who abuse the market or betray the good faith of customers, and they are not limited to the fines that they can issue. If this is not enough, they are also able to apply for injunctions to prevent them from working as well as forcing them to pay constitution. In extreme cases, they even have the power to prosecute.
In other words, the FCA can create a lot of problems for companies that do not play by the rules. And they can do all of this with whatever notice they wish, which means that they can deal with situations quickly as and when required.
What has the FCA changed so far?
The FCA has made a number of changes to the way payday loan companies can lend money to customers. It now has power over 50,000 firms that lend a total of around £200bn every year. Here are some of the biggest changes:
- Currently, a person who cannot afford to repay a loan at the end of the month is able to let it roll over into the next month. Although convenient at the time, this small loan can end up spiralling out of control and creating a long-term debt due to interest fees and rollover fees. New FCA rules state a person is only able to roll over a loan twice before it needs to be paid, preventing repayments adding up and creating a cycle of debt.
- A Continuous Payment Authority (CPA) is used by most payday lenders to collect payments, however, not all lenders give sufficient notice when taking money out of your account. This can lead to bank charges or people having difficulty paying their bills on time. Lenders are now limited to just two failed CPA attempts before contacting you, rather than being allowed to continue to try and withdraw money from your account.
- There is now also a limit on how much a lender can collect via CPA. Lenders can now only take payments if a person has enough money in their bank account, and part payments are no longer allowed.
- Lenders and debt management firms must now instruct and provide guidance to customers on where they can find free debt advice. This needs to be provided before a borrower re-finances or rolls over a loan.
- The new rules limit the amount of interest a lender can charge, while the FCA also has the power to enforce affordability checks for borrowers.
- Any adverts by payday lenders that are deemed to be misleading can now be banned by the FCA. Some are unaware of the potential risks associated with taking out any loan, so all advertisements now need to make sure that these – and the amount of money a borrower could end up paying – as clear as possible.
- A risk warning must now be displayed on all electronic communications and forms of advertising, warning of the consequences of late repayments.
What do the FCA changes mean for you?
As a consumer, the main thing to take away from the FCA’s changes is that you are now better protected than ever before and that short-term loans are now even safer. Many of the new rule changes give consumers more benefits to prevent them from getting into debt with rogue payday lenders. The changes also make it harder to rack up a larger debt – due to roll over fees and interest – with one sole lender. Borrowers should now feel more in control of their finances, and extra warnings and information should make people more aware of the potential risks of taking out a payday loan.
Final thoughts on the FCA
Customers will now still be protected if they are unable to keep up with repayments in a particular month, as lenders are no longer allowed to take part-payments by CPA. This means anyone with insufficient funds in their account will have their money safeguarded. This allows room to pay other bills and avoid getting further into debt with other companies. Customers are able to consent to a smaller amount being taken every month, in order to pay off their debt more easily and without triggering additional charges.