The regulatory watchdog for the payday loans sector, the Financial Conduct Authority, implemented new far more stringent rules form 2014 onwards for the industry. In fact, it is estimated that the FCA’s new rules have saved payday loan borrowers approximately £150 million so far.
Prior to 2014, the payday loans industry was barely regulated and many companies were failing to meet even the basic loan standards set for them.
This included failing to implement adequate affordability checks to ensure borrowers could afford the loan amount they were applying for. Many payday loan companies also had sky-high interest rates for their loans and failed to make clear to customers the possible risks involved with late or no repayments.
The FCA wanted to create a fairer system that better-protected payday loan customers, some of whom can be the most vulnerable in society. This included new payday loan regulations such as:
- A price cap of 0.8% on the daily interest rate
- No customer will end up paying double for their loan
- Default fees are capped at £15
- Required to show representative APR next to each call-to-action button
- Each lender must provide a link to a price comparison website (PCW)
- Every payday loan company needs to be authorised
We will explain in further detail each of these new regulations proposed by the FCA:
Price caps at 0.8%
The FCA has put in place price caps on payday loans. What this means, is that all payday lenders must ensure that borrowers will never pay more than 0.8% of the daily amount borrowed. This equals to £24 per £100 – and therefore any charges by payday lenders should not exceed this.
A cap of 100% of the loan repayment amount
New FCA regulations also state that lenders in the payday loans sector must have a cap of 100% on the total loan repayment amount. This has had a significant impact on borrowers, as it means that they will never be in a situation where they end up paying double for their loan. Before this ruling, it was unfortunately common for many to spiral into debt as the loan increased considerably in size.
Default fees at £15
Previously, payday loan lenders had free rein to charge whatever they wanted for missed payment fees. It meant the cost varied considerably from lender to lender.
Now, lenders can only charge a fee of up to £15 for missed payments on a loan.
Representative APR requirement next to each CTA
Payday lenders are now also required to show the representative annual percentage rate (APR) prominently on their websites next to any call to action. This is to help make it easier for customers to understand fees and charges and what they can expect to pay back for the loan. Previously, the industry was criticised for failing to make it clear to customers the associated costs that come with a payday loan.
Providing a link to a price comparison site
Following an investigation by the Competitions and Markets Authority (CMA) that was then released in February 2015, the FCA implemented new rulings about showing price comparison sites.
All payday lenders are now required to show at least one price comparison website (PCW) on their site. It must be displayed prominently, and not hidden away from view. This is to make it easier for customers to establish what loans are the best value for them. See our example below:
Payday loan authorisation
All direct payday lenders now require FCA authorisation before being able to lend to borrowers. This takes a minimum of 12 months. As there has been a crackdown on the number of payday loan firms that are authorised to run, there has been a sharp drop in the payday loan companies who are in operation.