Harry Hawthorne is a freelance writer and blogger for a number of new media organisations
What are payday lenders?
Payday lenders, also known as payday loan companies are organisations which hand out short-term loans that are intended to be paid back on your next pay day. The years since the financial crisis in 2008 have been the most successful for the industry, with 10 million loans taken out in 2012 alone. However, new regulations are being planned by the Financial Conduct Authority (The FCA) because of the number of people, even though it is a small percentage of payday loan users, who fall foul of enormous interest rates and enter a spiral of debt after failing to pay what is owed by the due date.
Guardian journalist Hilary Osborne wrote “The payday loan industry has boomed in recent years, and in 2012 more than 10m loans were taken out, each worth an average of £260. Interest charges on borrowing can be very steep, with big brand lenders charging annual rates of several thousand per cent, and debt charities reporting that in some cases loans have quickly grown to unmanageable sums”.
What is the FCA and what does it plan to change?
The FCA is an independent financial regulator which aims to keep the UK’s financial markets in check. For a non-government organisation it has a lot of power in the industry, As well as regulating professional conduct, it also has the power to set minimum standards, ban products, and investigate companies or individuals suspected of wrongdoing. We’ve all seen adverts for payday loan companies like Wonga, and these organisations answer to the FCA.
The FCA plans to implement a 0.8% maximum daily interest rate on all loans, with popular payday lenders currently charging significantly more than that. However, statistics have shown that only around 6% of users do fail to pay on time. There will also be a £15 cap placed on default charges, which is a separate additional fee from the interest rates if someone fails to pay on time. Finally, the most important change is a 100% cost cap. This means if a borrower has failed to return £250, no matter how long it takes them to return the money, they cannot ever be charged over £500 by the payday loan company.
Another phenomenon for which the FCA has created new rules is that of the Continuous Payment Authority, or CPA for short. This allows payday loan companies access to a customer’s bank account and gives them the authority to remove any sum (up to what they are owed) and also as many times as they wish. This system has been known to take money that the borrower had saved for other needs. The recent reform states that payday lenders can make two attempts to retrieve the money they lent, and that these must be for the full amount owed, as opposed to several part-payments.
The Archbishop of Canterbury, Justin Welby, also weighed in on the discussion. In the past he has been a critic of payday loans, but recently spoke of the necessity of payday loan companies, “if you knock payday lenders on the head before there is a viable alternative, in many parts of the country, the only place people can go is loan sharks”. He then added, “They do not send people round with baseball bats. One of the worries at the moment is if payday lending declines very rapidly and credit unions do not take up the slack, where will people turn? There is a danger of a gap in the market”.
There are pros and cons to the changes announced by the Financial Conduct Authority, but only the passing of time will tell us if they were a good idea. The general consensus is, at present, supportive of the rule changes. However, if there was a marked increase in problems with loan sharks, as Archbishop Justin Welby warned of, then those who support the changes may have to eat their words!
It will be interesting to see in what direction the money lending industry will head, with several small companies and even a couple of larger ones exiting the business in light of the latest changes to the law. After the economic crash there is no doubt that payday loans were helpful to thousands of people, the statistic of 94% of people returning their loan without issue proves that. But, there could well be turbulent times ahead for many payday loans.