When the Financial Conduct Authority (FCA) took over from the Office of Fair Trading in 2014, they introduced a number of stringent measures to regulate the payday loans industry.
Until this point, many victims had been overcharged and suffered financially due to the lack of affordability checks, large fees and poor data protection.
Today, it is a far more regulated environment for lenders and borrowers, to ensure that customers are treated fairly and given products that they can afford to repay, without falling into financial difficulty.
To become a lender or broker in the payday loans
or high-cost short term loans industry (HCST), every company must have full authorisation from the Financial Conduct Authority.
This is a lengthy and thorough process to ensure that companies are fit and proper to be lenders or intermediaries for consumer finance products.
The authorisation process includes submitting:
- Business plans
- Confirmation of financial reserves
- Background checks of company directors
- Processes for data protection, payments, collections and more
- Training in data protection and compliance
- Ongoing compliance checks
The average authorisation process can take between 12 to 24 months, although this may be achieved quicker through the use of solicitors or those with previous experience.
The cost of an FCA authorisation application
ranges from £1,500 to £25,000 based on the complexity of the business. This is a one-off fee, however, you may incur additional costs for using solicitors or experts to assist with your application.
One of the biggest changes in regulation introduced by the FCA in January 2015 was a daily price cap of 0.8%
, equal to £24 per £100 borrowed in 30 days.
High cost short term lenders are also prohibited from charging more than 100% value the loan taken in interest and charges, i.e. a customer ca not be charged more than £100 in interest and charges for a loan taken for £100.
This is a limit that lenders cannot charge above and is designed to ensure customers do not repay double the amount that they have borrowed.
Before this price cap was introduced, the average payday lender charged around 1% per day and were able to freely offer rollovers and extensions, which sometimes drastically increased the price of their original loan.
The price cap was later reviewed in 2020 and the regulator confirmed that they were content with its implementation.
Cap on default charges
In addition to the price cap, the FCA introduced a cap on default charges of £15. This refers to any customers that have missed a repayment and whilst some lenders will give the customer breathing space of 24 to 36 hours, if the payment is not made on time, a maximum fee of £15 may be applied.
Beforehand, the average default fee was £30, although some lenders would charge higher than this and there would be no limit on the number of times that they could charge this.
Transparency of prices
To improve the transparency of rates charged, all participating lenders and brokers must now clearly state a representative example and Representative APR next to any call-to-action on their website and offline marketing material.
This is aimed to help customers see the price of a payday loan and be fully aware of any costs, the repayments and the APR
, prior to applying.
Mention on price comparison websites
A further measure to improve transparency in the industry was to make it obligatory for every lender to feature on a price comparison website (PCW).
Furthermore, every lender’s homepage must state which PCW they are mentioned on and provide a clickable link that users can navigate to and compare prices of similar products.
Strict affordability checks
Following the introduction of the FCA, every lender must carry out credit and affordability checks, prior to funding any application.
This was not a requirement before the regulation was introduced and is now designed to determine the eligibility of each candidate and ensure that they can afford to repay their loan without falling into difficulty.
Examples of affordability checks include:
- Credit checks
- Income checks
- Monthly expenses
- Verify customer information
The payday loans industry has seen a drastic change since the introduction of FCA regulation.
Prior to 2015, there were over 200 payday lenders in the UK and thousands of brokers.
Today, there are less than 25 lenders and a handful of successful brokers.
From a customer’s perspective, there is a greater transparency of products and only the most legitimate and compliant lenders remain.