The payday loan industry was regulated by the Office of Fair Trading until 2014. Today they are regulated by the independent regulator, the Financial Conduct Authority (FCA), which has the enforcing standards which they have put in place for the payday loan companies to adhere to.

Over the years, the payday loan industry has had a bad reputation, mostly for charging very high interest rates on small loans, giving the impression that they were taking advantage of the most vulnerable consumers. With the introduction of the new regulations, set out by the FCA, these companies have had to remain compliant with the strict guidelines in place, ensuring that their customers receive a fair deal.  With the introduction of the regulations set out by the FCA, many payday loan companies closed, as their lending practices did not comply with the rules in place.

Changes Put in Place by the FCA

When it came to the short term payday loan industry, the FCA has two important goals. The first is to protect the consumer, eliminating the risk of being overcharged and misled and the second is to help consumers who are already struggling with debt from being pushed deeper into debt with out of control debt and repayments.

The changes introduced ensures that lenders access the creditworthiness of the consumer, along with their ability to repay the loan before issuing any payday loans. There has also been a cost cap of 0.8% per day introduced on short term credit loans with a default for late payment capped at £15.

In addition to this, a total cost cap of one hundred percent of the amount borrowed was introduced, ensuring consumers never have to pay more than double the amount originally borrowed. Payday loan companies can only extend a loan to a consumer twice, providing a FCA information sheet, which contains the details of the companies offering debt advice. Further, a lender can only try and collect an unsuccessful payment twice using a Continuous Payment Authority (CPA) and they cannot attempt to collect part payment using this particular method of repayment.

The changes introduced protects  vulnerable consumers, who would find themselves deeper in debt if they chose a payday loan.

Positive Impact

The FCA review in 2017 showed that the changes that were introduced had a positive effect on consumers. They are concerned about unarranged overdrafts and by introducing these regulations, the consumer is protected against spiralling debt.

The regulations introduced included:

• A price cap on short term credit
• Limiting the number of times a payday loan can be rolled over
• Stricter affordability checks and financial health warning

How the Payday Loan Industry has Changed as a Result

There has been significant improvements since the introduction of the FCA payday loan regulations, as the industry has adapted and made necessary changes to a post price cap. It still shows that some consumers are not fully aware of how may a payday loan will cost with many having more than one or two loans in place. 

In Summary

The FCA, which is an independent body, have introduced stricter regulations on the payday loan / short term loans industry. The payday loan industry were considered “loan sharks,” they were offering short term loans of a couple of days to weeks at exorbitant interest rates, which were negatively impacting consumers. With the help of the FCA, consumers are enjoying more protection, lower interest rates and the industry is governed, monitored and regulated to protect consumers with the focus of helping them eliminate the risk of spirilling debt in the long run.