Recent reports of a 45 percent reduction in the number of complaints received by the Citizens Advice Bureau when compared to the same time last year is a sure sign that sweeping regulatory reform is starting to take affect.
In January to March 2014, Citizens Advice received 10,155 complaints about payday lenders. The number fell to 5,554 for the same period this year.
What changes has the FCA made?
The Financial Conduct Authority (FCA) introduced tough new rules to regulate the industry. The first of these changes was introduced in April 2014, followed by a price cap limiting the total cost of a loan in January 2015. While many commentators would argue these reforms were long over due, they do now seem to be having the desired effect and are forcing short term lenders to clean up their act.
The FCA’s rule changes were designed to regulate the way lenders operate on three fronts. Default fees have been capped at £15 to protect those who are struggling to repay their debts; the total cost of a loan has been limited to 100 percent of the original amount; and the total interest and fees have been capped at 0.8 percent per day. The result of the changes is that someone borrowing £100 for 30 days cannot pay more than £24 in fees and charges if they repay the loan on time.
A fall in the total number of lenders
The attentions of the FCA have caused some of the industry’s biggest names to slash their workforce or leave the industry entirely, while a new breed of more responsible short term loans provider such as wizzcash.com, have filled the space they’ve left.
Some commentators anticipated that regulatory reform on this scale would result in the number of lenders in operation falling from up to 400 before the new rules came into force, to just three or four. However, this hasn’t been the case, with some 247 lenders applying to the FCA in February for authorisation to trade.
There is also no shortage of demand for short term loans, with a recent report by a leading payday lender identifying close to 13 million people across the UK that are both ‘cash and credit constrained’, and under-served by mainstream financial services.
The worry is that if payday loan providers disappear from the market entirely, there would be nowhere for these borrowers to go. Their only option might be to turn to illegal loan sharks for help.
With that in mind, the news that the payday lenders are cleaning up their act should be well received by consumers and commentators alike. While some charities might argue that payday loans are the cause, not the cure of financial stress, until the banks start to lend to those they are currently turning away, short term loans present the only real option for those in need of emergency cash.