Before 2015, payday lenders were charging exorbitant interest rates on loans that drove many of their victims to bankruptcy, while others never seemed to get out of debt in spite of how much more they paid in comparison to the amount they borrowed.
The FCA Intervention of 2015
The Financial Conduct Authority (FCA) had to step in to handle the situation and regulate the market back into some sort of stability.
The ensuing strict restrictions on payday loans and their lenders limited the exploitative capabilities of the system as a result. There were three primary rules introduced to get that result, which are as follows.
Limiting the Roll-Overs
Payday loans could no longer be rolled over forever, which meant that the debt had to come to a stop, instead of becoming a lifetime burden in a downhill rolling snowball pattern.
HCSTC Caps
HCSTC stands for high-cost short-term credit, which entails more than just payday loans, but payday loans were certainly the prime target of the caps introduced by the FCA. To know more about the HCSTC caps, check out the FCA website here.
Financial Condition and Affordability Checks
If someone takes a payday loan and is incapable of paying it off in time, it would naturally begin to go up to ridiculous amounts, even with the FCA regulations, unfortunately. This is why the Financial Conduct Authority introduced mandatory affordability checks and guidance on the borrower’s own financial condition.
This meant people were now being well informed about the interest rates, how much they would have to pay each month and in total, what the penalty of missing payments would be, and what would be the total amount of money they would have to pay by the end of their payday loan tenure.
Also, payday lenders must now make sure that the individual applying for the loan can actually afford to pay it back with interest before approving it.
The Impact of the FCA Standards Gave Rise to FCA-Authorized Payday Lenders
A lending business such as LoanPig is an FCA approved, authorised, and regulated payday lender that cannot go beyond the legal stipulations put into place by the Financial Conduct Authority. You can find out more about them on their official website, where every little detail about each loan amount, associated interest rates and the eligibility criterions are clearly mentioned.
That’s a fine example of how FCA managed to control the fluctuating market conditions, as payday lenders now have to either abide by the rules or be deemed illegal.
In spite of the success seen in the last four years, there is still room for improvement. During surveys, it was reported that a good number of lenders were not conforming to the rules, while some of the borrowers are finding it difficult to understand the interest rates, APR, etc., even now. Perhaps a revision is in order to further improve the situation in light of Brexit and the constantly dropping value of the pound sterling.