The Financial Conduct Authority (FCA) is the body charged with regulating the payday loan industry in the UK. The FCA began regulating payday loans among other forms of high-cost short-term credit on 1st April 2014. Initially, the regulator focused on tackling poor conduct present in the industry.
The FCA began by introducing new rules on affordability, rollovers, advertising as well as the use of recurring payments (continuous payment authorities). The regulator then took a supervisory role focusing on payday loan lenders breaching the new regulations/requirements.
The UK parliament gave the FCA the duty to cap prices of short-term loans/credit products like payday loans to protect borrowers from unfair lending practices in December 2013. The rules, however, came into effect two years later (on 2nd January 2015). The regulator was involved in the entire process. The main aim of the regulatory changes was to see the price of high-cost short term loans/credit like payday loans come down and make sure borrowers never pay back more than double the amount borrowed.
According to the then FCA chief executive officer, Martin Wheatley, the new rules were meant to put an end to increasing payday debts and offer borrowers effective protections without affecting the viability of the market.
FCA stance on payday loans today: Price structure/levels
The FCA published new payday loan price caps in July 2014. The price cap structure/levels remain unchanged to date after taking effect on 2nd January 2015. They include;
• Lower costs for most borrowers. The FCA set the initial cost cap to 0.8% per day. All high cost short term loans, fees and interest should not exceed 0.8% (per day) of the amount borrowed. The initial cost cap remains unchanged to date and applies to the outstanding principal, all interest, and fees charged per day during the loan term as well as when refinancing. Payday loan lenders are however free to structure charges as they wish provided they don’t exceed the 0.8% cap.
• New protection from borrowers struggling to pay: The FCA also set default fees at £15. If a borrower has a hard time repaying their payday loan, default fees (default charges as well as interest on unpaid balances) can’t exceed £15. Interest can increase but can’t exceed the initial cost cap.
• Cost cap on escalating debts: The FCA also set a 100% cost cap ensuring that borrowers never pay back more in interest and fees than the initial amount borrowed. The cap covers debt administration, debt collection, and other ancillary charges as well as credit broking charges.
From 2nd January 2015, no UK payday loan borrower has been charged twice what they borrowed, more than £15 in default fees or more than 0.8% in interest and fees per day of the amount borrowed. The price cap structure/levels will be reviewed in 2017.
FCA payday loan regulation today on: Repeat borrowing, data sharing, supervision, and E-commerce directive
FCA regulations remain the same for repeat borrowing. All price cap structure/levels remain the same as for the 1st loan. The FCA is however in the process of assessing the impact of repeat borrowing.
The FCA requires all lenders in the UK payday loan industry to participate in real-time data sharing to ensure majority of the payday loans are reported real-time. Although this regulation hasn’t been fully implemented, the current progress is in line with the regulator’s expectations.
The FCA is currently following its standard model supervisory approach
E-Commerce Directive (ECD)
The FCA currently prohibits UK-based debt collectors from collecting debts that arise under high-cost short term credit agreements entered into by incoming e-commerce directive lenders who charge more than the set price caps. Also, UK-based debt administrators are prohibited from enforcing or exercising rights on behalf of lenders under such high-cost short term credit agreements.
The FCA is in the process of gaining powers to take action against incoming lenders who avoid rules by abusing freedom of movement rules.
Other FCA regulation stances today
Insider dealing: The FCA has powers to investigate as well as prosecute insider dealing in the UK payday loan industry as stipulated in the 1993 Criminal Justice Act.
Supervision: The FCA also has the right to supervise all regulated payday loan lenders as well as all other regulated financial firms.