Short term loans in 2014: a review

The payday loans market has come in for some considerable criticism during the last few years and come under the spotlight of the consumer credit industry’s watchdog, the Financial Conduct Authority (FCA).
 
What has all that attention meant for payday loans in 2014 – and what are likely to be the longer-term implications?
 
The year at a glance
 
During 2014, the principal influences on the payday loans industry have been:
 
 - the introduction of new regulations by the FCA;
 
 - an ongoing investigation by the Competition and Markets Authority’s Payday Loan investigation group; and
 
 - thanks to these two developments, a weeding out of some of the known rogue traders in the market and a contraction in the number of payday loan operators in Britain.
 
Although some operators may have been forced out of the market, others, such as heavyweights Wonga, for example, continue to go from strength to strength (as their own published statistics tend to confirm).
 
FCA Regulations
 
These came into effect on the 1^st of July 2014, effectively requiring payday lenders to:
 
 - make greater efforts to ensure that payday loans are advanced only to customers who find them affordable – affordability checks, in other words, that might lead to a serial user of payday loans from being granted any further borrowing;
 
 - to “roll over” loans – extend the period of repayment for any customers struggling to pay off a loan – for a maximum of just two times;
 
 - limit their attempts to recover outstanding debts by the use of continuous payment agreements to a maximum of two attempts;
 
 - prominently display in any form of advertising a warning to customers about the possible consequences of defaulting on loan repayments and the penalty charges that might apply; and
 
 - advise customers where they may find free debt counselling, advice and help.
 
Competition and Markets Authority’s Payday Loan investigation group
 
The group was charged with conducting an investigation into the market in June 2013 and produced a preliminary report at the beginning of June 2014.
 
The principal finding in this initial report was that the there is still insufficient transparency by some payday lenders, leaving customers with not enough information to choose a lender on the basis of price, the type of loan being offered or the penalties for late payment.
 
In order to encourage greater transparency and to stimulate competition (and lower prices) in the market, the investigation group recommended the setting up of an independent comparison website of payday loan companies and their offerings.
 
Contraction in the number of lenders
 
According to analysis conducted by the Financial Times and reported in its edition of the 20^th of May 2014, one in three of the country’s 210 payday loan companies failed to apply for the necessary permission from the FCA to continue in operation.
 
According to the same report, a further 30 lenders either surrendered their licences or had them revoked.
 
It appears that the new regulatory regime, the whipping into line of rogue elements and the ongoing investigations by the Competition and Markets Authority may be clearing the way for reputable lenders to operate without the cloud of suspicion that has recently gathered over the industry as a whole.
 
The future
 
It seems that the regulators are still not done with the industry however. With effect from the 1^st of January 2015, further regulation is due to impose a cap on the maximum amount of interest that may be charged by payday lenders.
 
Although such caps may be in place in other countries, the move in this country has met with rather less than overwhelming support. The Chief Executive of the Consumer Finance Association, Russell Hamblin-Boone, for example, has argued that a cap on interest rates – or price control by any other name – may have the undesirable effect of driving reputable lenders out of the market, forcing prospective buyers to search elsewhere and, in doing so, possibly falling prey to illegal loan sharks.
 
It may be difficult to predict just how the payday loans industry might respond to the regulation already in place, the further controls suggested by the Competition and Markets Authority and to the proposed introduction of a cap on maximum rates of interest due to be introduced at the beginning of 2015. It seems clear, however, that some sections of the industry are already concerned that over-regulation may lead to its unwelcome borrowers getting further in to debt by using other means of credit.
 
Claire Carpenter is a freelance journalist who writes for business and finance magazines.