Payday loan industry to be hit hard by new regulation

Around 25% of companies in the payday loan sector may be forced to close down, due to growing pressure from new rules that are set to be implemented in the next month.

The Financial Conduct Authority are set to take over as industry regulator on April 1st, and have already pledged to ëshake upí the sector and instigate a series of new regulation that will make payday loan borrowing far safer for consumers. 

The FCA have also pledged to investigate the manner in which payday loan lenders behave when a borrower falls into arrears on their repayment, and promised to heavily penalise all firms that are shown to display poor practice when dealing with struggling customers. 

Martin Wheatley, the FCA's chief executive, told the BBC: "I think our processes will probably force about a quarter of the firms out of the industry and that's a good thing because those are the firms that have poor practices. And for the rest - we want them to improve."

The FCA revealed that its recent data had indicated that over 33% of individuals who take out payday loans default on their accounts, and a large proportion of this group fail to pay their loan back at all. The future regulator has made late repayment management their priority, and has urged payday loan companies to clean up their act, so that the country can begin to start resolving its endemic personal debt problems. 

The majority of payday loan companies have promised to be fully supportive of any investigation that the FCA chooses to undertake, and adjust their activity in accordance to any new practice regulation that is instigated moving forward in the future. 

ëGround rulesí

The announcement that the FCA would take over from the Office of Fair Trading as consumer credit regulator was made early last year, and since then they have persistently outlined their intention to instigate a radical overhaul of existing industry regulation so that the sector is a far safer borrowing platform for its users.

Future regulation that has previously been identified are the introduction of a cap that would only allow borrowers to ëroll overí their loans twice, and a maximum interest threshold that lenders must adhere to when chasing their debtors up for repayment. It is thought that a number of other new rules will be released on the day the FCA take over as regulator, April 1st, with a number of payday loan companies preparing for the worst.

Mr Wheatley said the FCA would implement new policy that addresses a number of key deficiencies in the sector at present, identifying: "Stopping profits from vulnerable people is one thing; capping the absolute cost of these loans is another; and stopping lending to people who will never be able to repay. They're the ground rules that we will be introducing that will change this industry."

Mr Wheatley however did reiterate that evaluating the manner in which payday loan companies deal with borrowers who are struggling to repay will be their primary initial task, and outlined his intention to analyse whether they act in the best interest of the borrower when they are in default, so that the FCA can ascertain whether they are solely profit orientated or committed to helping people resolve their difficulties. 

"We are putting much more stringent affordability criteria in place for lenders, to say you have to take into account whether people can pay, what their free cash flow is, what their income is."

Mr Wheatley highlighted that analysing this area of payday lender activity was of the utmost importance because an estimated 60% of complaints made to the existing regulator, the Office of Fair Trading, are due to lender practice when pursuing debt recollection. 

The Consumer Finance Association (CFA), the industryís trade body, issued their support for the FCAís future regulation, but highlighted that lenders within their governance had already begun the process of cleaning up their codes of practice by freezing interest and late charges on their borrowerís accounts. 

CFA chief executive Russell Hamblin-Boone said: "We have been driving up standards for some time now through our code of practice and from 1 April, there are statutory rules that lenders will have to work to, and I think we will see the worst practices being driven out and only the best lenders continuing to operate."