(ThyBlackMan.com) With effect from the 1st of July 2014 it has become much more difficult for rogue traders to operate in the payday loans market.
Following the introduction of tough new rules by the Financial Conduct Authority (FCA), the industry has seen the number of such lenders reduced by almost 50%. 70 of them simply failed to apply to the FCA for the necessary permission to continue in business, whilst 30 rogue traders already identified by the FCA have had their licences revoked.
What makes a payday loan rogue trader?
Since it took on its regulatory role for all matters relating to consumer credit on the 1st of April 2014, the FCA made it clear that there was no place in the market for payday loan lenders who cared only about making “a fast buck”.
In practice, this appears to be a particular reference to the way in which some lenders:
- failed adequately to check whether borrowers are able to afford the repayment of a loan;
- treated customers who may be facing difficulties in repaying the loans;
- misled or downplayed to customers the risks of taking out a short-term, high interest loan;
- overused the number of times a loan may be “rolled over” – the practice of simply lengthening the term of a loan that has not been repaid by rolling it over into what is effectively a new loan; and
- misused continuous payment authorities to secure payment from customers already in difficulties in repaying their loans.
The new regulations
The regulations introduced by the FCA with effect from the 1st of July 2014 address each of these areas of concern – and in so doing have already had some effect in forcing the worst of the rogue traders out of the market, either through their own choice or as a result of their licences having been revoked.
The treatment of borrowers experiencing difficulty in repaying their loans attracted particular criticism from the FCA, which claimed that as many as
one in three payday loans are repaid late or not at all. This is clearly not the case with some of the leading payday loan lenders in the country. Wonga, for example, insists that it is in business because the vast majority (85%) of its customers repay their loans on time or beforehand – in other words, considerably more than the 66% suggested by the FCA’s statistics.
In future, all prospective borrowers face more stringent affordability checks, so that applicants who have already taken out several payday loans may be rejected a further loan. Responsible lending is made somewhat easier for lenders, thanks to a new real time data sharing service called MODA – and developed by the credit reference agency CallCredit – which allows any lender to check whether an applicant has applied for multiple loans. The database is updated every 15 minutes.
The new regulations also stipulate that payday loans may only be rolled over a maximum of two times.
Payday loan companies are now prevented from abusing continuous payment authorities to collect outstanding payments from borrowers. This is a mechanism that allows the lender to take the money directly from a customer’s bank account or credit card. In future, this mechanism may only be used twice in the event of defaulted payments. After these two attempts, the continuous payment agreement may be renewed, but only as part of a new loan (when the rules on rolling over loans may also come into effect).
If the borrower remains in difficulty repaying the loan, the lender is now obliged to freeze any further interest or other charges on the account and the customer must be provided information about where to find free debt help, advice and counselling.
In future, all advertising – whether online, in print, or broadcast by television or radio – must include a prominently displayed warning about the potential risks of taking out a payday loan, with the lender specifying what penalties may apply if the customer defaults on the repayments.
The future for rogue traders
Although as many as a hundred former payday loan companies may have already quit the market, it may be unfair to brand all of these as rogue traders. The new regulations issued by the FCA, however, seem likely to make it far more difficult for rogue trading in the future, thus clearing the market for more reliable, reputable and transparent lenders.
Staff Writer; Charles Porche