Ever since payday loans were introduced to the UK market in 2006, the industry has boomed and now companies like The Money Shop, Wonga and Cash Convertors can be regularly seen on the high street or on the internet advertising their services. The reason that they have been criticised is because they charge high levels of APR or interest with an unlimited cap on rolling over the monthly loan, meaning that it is easy to incur unrealistic levels of debt. Moreover, there is currently no limit on the amount of payday loans that a customer can apply for, therefore it is becoming increasingly common for a customer to take out one payday loan, simply to repay another. The argument is also that these types of loans are targeting those who are vulnerable. Therefore parliament is voting today in favour of implementing some restrictions.
The payday loan industry simply cannot be ignored anymore. It is now worth over £1 billion in the UK alone with over 4 million loans being allocated every year since 2009. The industry continues to grow every year by approximately 40 – 45 per cent which is an alarming rate. The main reason for this is because the industry is largely unregulated currently in the UK, therefore companies behind the payday loans brands want to capitalise upon this while they can. This means that they currently supply loans to pretty much any customer regardless of their credit history therefore they do not try and understand whether or not the consumer has the capacity to repay the loan.
The industry has been accused by many as targeting the vulnerable and the Chairman of the FCA committee, Adrian Bailey MP, argued that:
“During these difficult economic times, increasing numbers of people up and down the country – not least some of the most vulnerable members of our society, are relying on the provision of consumer debt management services and payday loans to make ends meet.
And yet this industry remains opaque and poorly regulated. Despite a government consultation that ended almost a year ago, little has been done to remedy the situation.”
This is a serious claim which is further founded by an investigation by the OFT into 50 websites, which identified concerns that these lenders were ‘targeting vulnerable customers and offering poor advice. ‘
Furthermore, because there is no regulation, there is no cap on the amount of times a consumer can ’rollover’ their debt which means that every time they do so, they incur another months interest. If you consider that the most competitive rate offered is around 1737% which means that it costs £50 to borrow £100 for one month, the debt quickly mounts up.Some companies even have hidden charges for ‘admin fees’ which means that in the long run APRs can eventually reach up to 16,000%. Coupled with this, there is no limit on the amount of payday loans permitted per person. Research has shown that most people with one payday loan, actually end up with four loans in the long run and the most common reason given for requesting these types of loans is to repay another payday loan.
This means that the situation in the UK at the moment is that payday loans are extremely lucrative for the companies supplying them as consumers pay a high rate of interest and often cannot afford to repay the loans or even request another loan meaning more revenue for the business. Because the US and most European countries regulate this industry, payday loans companies from overseas are flocking to the UK market to profit from the lack of regulation while they can. Therefore without regulation, these trends will continue which means that payday loan consumers will end up in a situation best described as ‘financial quicksand.’
These trends however have finally been recognised by the government and Stella Creasy the Walthamstow MP is leading the way by calling for a new financial regulator to be given the power to set the maximum amount of money that a payday lender can charge for credit. This is because currently, there is no limit which is a dangerous situation for people who find themselves unable to repay their loans. The move would mean that there would be a cap on the amount of money charged for borrowing rather than on the level of interest, protecting consumers from incurring unrealistic amounts of debt.
This review would see the introduction of the Financial Conduct Authority (FCA) to replace the Financial Services Authority. It would also mean that the Office of Fair Trading (OFT) who are currently regulating the industry (albeit in a limited way) would pass over their consumer credit responsibilities to the FCA. The overall objective of the FCA is to protect customers from being mis-sold poor financial products.
The current role of the OFT is to provide credit licences to companies to show that they are operating legally, which extends to payday loans companies. They can revoke these licensees if they find that a business is breach of their credit licence. This is the only regulation that the payday loan industry currently faces and ultimately offers no deterrent from bad practise as it can take years for the licence to actually be taken away. In addition to this, big payday loans companies are now so profitable that they are making millions of pounds a year in profit therefore being fined by the OFT again is simply no real deterrent.
Responsibilities of the FCA would include making rules or applying sanctions to the person who is offering credit including the maximum total cost for a consumer’s product and the maximum duration of a supply of a product or service to a customer. Therefore they would have more clout to actually regulate the industry and control the current payday loan heavyweights. The moves would be similar to those implemented by our European neighbours and also the US to regulate the UK industry.
The payday loans industry will be in for a wakeup call if parliament vote in favour of these proposed financial regulations. Although cash till payday loans companies do have a place in the market for short term loans, they need to be regulated to an extent to eliminate those who are targeting vulnerable customers and those who are incurring unrealistic amounts of debt.
About the Author:
Laura Susstance is an experienced financial writer focusing on personal finance and debt, When not writing content on a freelance basis she writes content for her payday loans review website.