Many people in Britain applauded when the FCA (Financial Conduct Authority) put an end to Wonga-style payday loans back in 2015. Fast forward two years later, the applause is over. In fact, fear has set in over whether the FCA’s payday loan assault has resulted in a new uncontrollable headache for borrowers.
The FCA has gone as far as launching an investigation on the impact of the payday loan cap on borrowers. There is evidence from numerous industry sources (debt charities and industry groups) suggesting that there is an increasing number of people who have been completely locked out of the credit markets or have been forced to turn to high-cost loans.
According to Jane Tully, Director of External Affairs at Money Advice Trust, it is possible to ”regulate away” supply but you can’t ”regulate away” demand. Simply put, the FCA’s actions only dealt with the supply of payday loans (payday loan lenders) but didn’t think about the effects on borrowers.
According to Tully, payday loan problems have been displaced. There are many people today who are accessing many other forms of high-cost credit because they have no option. Such people have a higher chance of falling into debt now more than ever.
Although the FCA payday loan cap was designed solely to tighten lending practices as well as protect borrowers, the cap has had negative effects such as killing the supply of payday loans. This has, in turn, left many people with fewer suitable short term loan options.
Before the cap, the payday loan industry had two main industry players namely; Wonga, and Dollar Financial. These dominant payday loan lenders are in the process of being forced out of the payday loan lending business.
Wonga’s revenues dropped by a record 64% in 2016. Dollar Financial has already closed hundreds of Money Shop stores and put their payday loan business up for sale.
According to the CFA (Consumer Finance Association) C.E.O., Russell Hamblin-Boone, the payday loan industry markets to a higher demographic, however, this has attracted some unforeseen consequences. The CFA represents twelve of the biggest payday loan lenders in the UK.
According to recent consultations carried out by the FCA, there is a sharp increase in the number of UK citizens missing their utility bill payments in the past two years.
According to debt charity; StepChange which focuses on individuals facing financial distress, over 40% of all its clients miss one or more bill payments every month. StepChange has also discovered that 34% of all individuals who are denied payday loans turn to other types of short-term credit.
According to StepChange’s policy adviser, Laura Rodrigues, those people who miss bill payments state that they don’t have adequate money to cater for all their major expenses. Rodrigues also recognises the fact that there is a gap in the market that has been created by the FCA cap. There are few suitable alternative forms of short-term credit which exposes possible FCA social policy issues.
According to the Consumer Finance Association, approximately 600,000 people struggle to get short-term loans in the UK as payday lenders continue exiting the market. The apparent squeeze on short-term credit supply has also forced people to fall into the hands of unscrupulous lenders now more than ever before.
Individuals who have been shut out from accessing short-term loans because of the tighter affordability checks have been forced to turn to high-cost credit products such as logbook loans, unauthorised overdrafts, guarantor loans, etc., which aren’t price capped or haven’t undergone serious regulatory scrutiny. According to the FSCP Chairman, Sue Lewis, the same protections applying to high-cost short term loans should apply to all other types of credit.
Although influential groups like the Financial Services Consumer Panel (FSCP) which advice the FCA have requested the government to regulate these types of loans the way payday loans are regulated, nothing has been done so far. The FCA, however, plans to lay out a post-cap policy this summer.