It’s been a busy couple of weeks for the short term lending industry. With the announcement of the Financial Conduct Authority’s (FCA) plans for a January 2015 cap on all payday loans, to the Archbishop of Canterbury’s U-turn on his anti-payday loan stance (he now believes short term lenders like Wonga are a safer option than the potential alternatives).
With so much action on the short term lending front line, it’s worth taking a closer look at how the FCA are doing and whether or not their strong, radical changes to the industry are a step in the right direction. With the whole industry preparing for a heavy dose of regulation from the FCA, will their new remit in the industry improve the state and public perception of payday loans or will the FCA prove as powerless as their predecessors the OFT?
A fresh start?
The FCA took over the regulation of the short term loan industry in April 2014, taking the reigns from the much slated OFT (Office of Fair Trading) whose scope was small, resources limited and reach short. With little bite behind its regulating activities the OFT was not equipped to handle the demands of the ever-growing short term finance industry. With this type of finance becoming ever more popular in the UK and with almost no real regulation in place to guide the conduct of the hundreds of short term lenders springing up, it was only a matter of time before calls for tougher regulation were answered.
And that’s where the FCA came in. The objective? Stringent regulation, applied quickly and firmly throughout the industry – laying a groundwork upon which the industry’s best providers can continue offering short term finance to borrowers who understand it, can afford it and want it. First on the slate for the FCA we have:
July 2014
- Mandatory “risk warnings” on TV, online, email and text message advertising
- Extra information for borrowers about where to find free debt advice
- Capped loan rollovers (lenders can now rollover a loan just twice)
- Capped CPA (Continuous Payment Authority) that means lenders cannot keep trying to access capital from customer bank accounts after their second attempt
January 2015
- 0.8% cap on interested per loan per day
- Caps on additional loan charges (thought to be around £15)
- Caps that ensure no loan ever costs more than double the borrowed amount
Sorting the wheat from the chaff
Whether or not the FCA’s measures will be effective or wholly positive remains to be seen, but their firm intent has already scared many less scrupulous lenders from the industry. Before the FCA handover there were an estimated 210 payday lenders in the UK. In advance of the FCA’s rise to power, close to a third of these lenders fled for the hills, failing to apply for permission to operate. In this area at least, it appears that the FCA have begun to weed the true bad pennies from the world of payday lending.
A learning curve
With many of the worst offenders sent packing, the FCA now have time and space to start properly regulating the good side of short term lending. This is a learning curve and committed payday loan companies like Wonga have the opportunity to work in cooperation with the FCA to really get to grips with the product their providing.
This will be a learning curve for the FCA too, as the path they must walk is a new and untrodden one. Many industry commentators have already raised concerns about the upcoming caps of January 2015. Some think that, with stringent caps in place, lenders will need to be more cautious and risk averse, turning many more finance seekers away and into the arms of dangerous options such as loan sharks.
Practice makes perfect
Yet, although it will be a long road, this could well be a hopeful picture. The FCA and Wonga (with other lenders from the industry) are now actively working together to ensure high quality standards of lending. With this kind of cooperation evident, many feel confident that, with a strong wind, this body could certainly turn the short term lending industry into a strong, well-managed and transparent sector.
Do you believe the FCA will change the face of short term and payday lending? Do you believe they need to apply more forceful measures? Share your opinions and experiences with our readers below.
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