The Safety of Payday loans has improved greatly since 2014 when the Financial Conduct Authority took over from the FSA and bought the high-cost, short-term credit sector under regulation.
When the FCA took over, they introduced many different and tough-to-meet new regulations so that consumers would only ever be offered safe and secure short term credit products..
Before that, payday loans and other types of short-term finance were under constant scrutiny by the media, by Parliament, and by debt charities. The first really negative stories on short-term loans appeared as early as in 2013, specifically around the charges and interest rates attached to these financial products.
Borrowers often found themselves in spirals of debt they couldn’t work their ways out of, no matter how hard they tried.
In desperation, some borrowers would take out quick credit products to pay off other loans whose repayments they could not meet.
After the new FCA rules were introduced, the unethical lenders and credit brokers left the sector.
The number of high-cost credit loan offers declined as did the number of people taking them out. It became harder for applicants to qualify for loans.
Payday loans had, within the space of a few years, joined the ranks of the UK’s safest financial products.
The new regulations have been considered that much of a success that the FCA are now considering introducing similar rules to other sectors.
The impact of the FCA on payday loan safety
The Financial Conduct Authority (FCA) has had a profound impact on payday loan safety.
The FCA was created out of the ashes of the Financial Services Authority (FSA), widely seen to have failed the country because of its “light touch” regulations which many commentators believed contributed to the severity of the Great Recession which began in 2008.
Many believed that the FSA did not only fail when it came to regulating banks but they failed in the duty to protect consumers against the worst excesses of the financial industry.
The FSA was split into two and from 1st April 2013, the Financial Conduct Authority was now in charge of regulating financial products to consumers. Among their new responsibilities was ensuring the safety of payday loans for consumers.
Consumers had, for too long, been left at the mercy of short-term credit companies operating without rules and without apparent regard to the consequences of their lending decisions.
The old Consumer Credit Licence system which allowed companies to lend and broker money to consumers was replaced with a much more stringent licensing scheme. All payday lenders and brokers had to have their own FCA licence to operate.
Changes introduced to increase the financial safety of payday loans
There were many changes introduced which contributed to a significant increase in the financial safety of payday loans.
Payday lenders now had to work to much stricter rules and regulations on how they assessed potential borrowers for their suitability for loans, including much tighter affordability assessments.
The companies themselves were thoroughly checked and assessed to make sure that they only offered the safest types of payday loans to borrowers. Many stopped trading as a result of these new rules and others were deemed to be not fit to hold a licence.
The result of this upheaval was a substantial reduction in the number of lenders and brokers offering payday loans.
These credit products became safe and secure because the FCA made periodic inspections of lenders’ and brokers’ internal documentation to ensure robust compliance processes were being followed
Price caps payday loans
The FCA introduced a variety of price caps and regulations to be applied to short-term consumer credit, increasing how safe and secure payday loans were for borrowers.
These new rules were put in place to ensure all borrowers were treated fairly by lenders, whilst restricting the level of debt a person could get into when taking out HCSTC loans.
The changes included:
A £15 default fee cap. If a borrower misses their repayment deadline, it is safe to assume they may be in financial difficulty. That’s why the FCA set a default fee cap of £15 to ensure lenders do not charge excessive fees for administration.
Highest chargeable interest rate of 0.8% per day. In the past, high-interest rates caused many borrowers to struggle and a high proportion of these borrowers eventually could not pay the interest accruing on a loan.
The FCA has since addressed this by capping total interest at 0.8%. This means that for a £100 loan, you will only ever be charged 80p of interest each day. Over a month, this would mean a maximum of £24 in interest added to your original debt.
A total cost cap of 100%. The most significant change brought in by the FCA was the 100% total cost cap. This ensures no borrower ever pays back more than 100% of the original amount they borrowed in interest and fees.
If you borrow £100, the most you will ever need to pay back to the lender is £200 in total – regardless of interest rates. This remains the case even if you struggle to make your repayments and have interest and charges added on.
Lenders must also publish risk warnings on all promotions and advertisements; stating that ‘late repayment may cause financial difficulty’.
Whilst these risk warning might not improve the overall safety of payday loans, they help people to make informed financial decisions when it comes to applying for credit.
It is important that you understand that since FCA come into play, every lender has been obliged to conduct a credit history check before issuing a loan. No-credit-check payday loans have gone out of existence in the form many people understand. Currently, financial institutions use no credit check loans as a name for a soft assessment that provides an estimated decision, but not a loan per se.
How GDPR regulation will further improve borrower safety
The General Data Protection Regulation (GDPR) will further improve borrowers’ safety. The GDPR was passed across all EU countries in 2016 and came into legal force in May 2018.
The new regulation is there to give consumers much more power over how companies use, alter, and transfer your personal details.
Compared with the data protection laws that went before it, it’s much harder for companies to become and stay compliant with GDPR. And GDPR plays a significant role in ensuring the security and safety of payday loans.
To get your loan approved, you’ll need to give a short-term loan provider or broker personal information including your bank details and credit history.
Before you put in any information, it is essential that you trust the lender and feel that they only provide consumers with safe and secure payday loans.
If you get it wrong and give your bank details to people you didn’t intend to give them to, it could result in money being stolen from your account.
So what do you need to look out for?
Important information to look for on a credit provider’s website
To keep yourself safe and secure, you should look for the following information on a credit provider’s website.
First, check the address bar. When you visit a credit provider or broker website, make sure you take care to look at the address bar at the top of your browser. At the beginning of the address, it should say ‘HTTP’ or ‘https’.
The ‘s’ on the end of ‘HTTP’ means the website you are using is secure, so you know any details you send through it are protected. If you don’t see this, don’t enter your details
Second, check the company out on the Financial Conduct Authority’s website. To make sure your lender or broker is FCA approved, you can check for them on the Financial Services Register on the FCA site using the lender’s name or postcode.
Check to see whether your short-term loan provider is a member of other professional bodies such as the BCCA. You should be able to find this information on their website, which will provide a little more certainty that they will keep your details safe.
Suspicious phone calls. If you receive a phone call from a payday loan company, it is always best to err on the side of caution – even if you recognise the number.
Fraudulent companies are well known for withholding numbers or choosing one close to a trusted loan provider to try to catch you off guard.
They also have their ways of finding your number in order to call and trick you into telling them personal information.
Never make any payments over the phone or disclose your password. If possible, visit the website of the company which called you to check the number, or get your case number and ask to call them back
What to do if you think your personal details have been compromised?
If you think your personal details have been compromised, make sure that you take the following steps.
For bank details or credit card information, call your bank or credit card company as soon as possible. They can put all the necessary steps in place to make sure no-one can access your money.
If you believe you have been a victim of fraud, call Action Fraud on 0300 123 2040 or visit https://www.actionfraud.police.uk/. Charities like Victim Support can also help if you need to talk about what has happened to you.
The safety of payday loans – Summary
Thanks to the intervention of the FCA, the safety of payday loans and other forms of HCSTC are amongst the highest in the financial sector.
Despite previous operators’ reputations, all legal short-term loan providers are now fully regulated so your safety is a key business priority. Please remember that safe and secure payday loans are only available from FCA-approved lenders and brokers.
You can check that your chosen lender is operating legally on the Financial Services Register. Reputable lenders should also be willing to talk about their online security and data protection.
If you do borrow money, the FCA’s price caps will limit the amount that you pay back and keep interest at a good level, so your debt cannot spiral.
The Financial Ombudsman can handle financial complaints you may have since they provide further protection if you are unhappy with the service you receive from your loan provider.
Safe and secure payday loans do exist – you just have to be careful about who you give your details to.
By using an industry-leading broker like CashLady to secure your loan, you won’t need to spend too much time researching different lenders. All of our lending partners are fully FCA authorised so you know you’re in good hands.
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