How has the financial services market reacted to regulation by the financial watchdog? Andrew Hagger, personal finance expert at Moneycomms.co.uk, comments.
The walls are closing in on payday lenders now that the Financial Conduct Authority (FCA) has taken over as regulator of the £200 billion consumer credit market.
According to the FCA, there are around 500 companies involved in payday lending, as well as many similar short-term, high-cost credit companies.
The new regulator made its intentions crystal clear to these companies from the outset (1April 2014) when its chief executive, Martin Wheatley, said that up to a quarter of payday firms could be driven out of business. He said: “We’d like firms to rise to our standards, but if they can’t, then they can leave the industry.”
Good news for consumers
This no-nonsense stance being adopted by the new regulator is well overdue, but it’s good news for consumers. In the future, lenders will have to carry out detailed affordability checks, and will only allow borrowers to roll their loan over twice, thus reducing the level of charges.
Payday lending has grown rapidly by using large profit margins to raise awareness among consumers through high-profile advertising, often on prime-time television. After years of consumer and media complaints, and threats to clamp down on payday lending, it finally looks as if decisive action will be taken to weed out firms that don’t play by the new set of rules.
According to the Competition and Markets Authority, payday lenders currently issue more than 10 million loans a year, worth almost £2.8 billion, but they are likely to see their profits severely reduced under the new FCA measures.
Furthermore, later this year, the FCA will be carrying out a review of the way that payday lenders treat customers who are in arrears. They will also look into debt collection practices.
There have been suggestions that these new measures to prevent levels of payday indebtedness will have a positive impact on the number of new bankruptcy cases. However, I’m not convinced that it’s as clear cut.
Until consumers with a less than perfect credit history have access to an alternative affordable source of credit, the knock-on effect on bankruptcy numbers will be negligible. If people are desperate to borrow money, and payday loans are no longer an option, there is a risk that they will turn to high-cost doorstep lending and loan sharks.
Repairing credit history
The FCA has a wide regulatory remit, and is showing its teeth in other areas too, with a credit card review due to be carried out later this year. This is aimed at protecting those with hardcore debts and those who are stuck in a seemingly never-ending cycle of minimum repayments.
However, more needs to be done to promote alternative borrowing options for those excluded from mainstream finance due to an impaired credit record.
A good but under-used example is specialist credit cards, which are offered by Luma, Aqua, and Vanquis. These offer a genuine opportunity for borrowers to improve their credit worthiness. The interest rates are higher than standard credit cards at around 35% to 40% APR, but they are much cheaper than payday loans.
To take an example, borrowing £400 on one of these credit cards at 39.9% APR will cost £13.55 in interest for 1 month, whereas the same sum borrowed over the same period from a payday loan lender such as Wonga will set borrowers back more than 9 times as much – at a representative APR of 5853%, it will cost £127.15.
For many people with a poor credit record, demonstrating a history of using a credit card in a responsible manner can help to rebuild their credit status. This means using the card and making repayments every month without fail, so over time their credit score will gradually improve.
Another more palatable option than payday finance is a guarantor loan provided by the likes of Amigo, which offers credit of up to £5,000, at a representative APR of 49.9%. To qualify for an Amigo loan, borrowers need to find a creditworthy friend or relative to act as guarantor. This means that if, for some reason, the borrower is unable to pay, the guarantor becomes liable for the outstanding balance.
Again, the interest rate is far cheaper than going down the payday loans route, plus Amigo loans are flexible, in that you are able to make additional ad hoc reductions without penalty.
The FCA is on a mission to stamp out what it considers to be unfair lending practices that make consumers’ lives a misery. Although the initial noises are encouraging, let’s hope that the regulator delivers real benefits, rather than the ‘tinkering around the edges’ that we’ve frequently witnessed in the past.
About the author
Andrew Hagger is a personal finance expert at Moneycomms.co.uk. With over 30 years’ experience in the financial industry, he is a frequent spokesperson on national radio and television. Andrew also writes regular money columns for The Independent, the Daily Mirror, The Scotsman and Money Market. You can follow Andrew on Twitter @haggerdoo.