The payday loan industry in the UK has regularly been at the centre of controversy and has constantly been criticised for charging high rates of interest by the media, politicians and religious figures. The industry was at its peak in 2013 and had an estimated value of over £2 billion with over 200 lenders operating in the country.
Fast forward to 2018 and the picture looks very different. The introduction of strict regulation by the FCA has caused several companies to exit and the increase in claims for ‘mis-sold’ payday loans has resulted in two of the largest lenders ceasing to accept new applications. We review some of the biggest changes in the industry below.
Increase in regulation
The FCA took over from The Office of Fair Trading as the City Watchdog in 2014. Without wasting any time, the regulator introduced tough measures for the high cost industry in January 2015. The main changes included a rigorous authorisation process for new and participating lenders and brokers (something which caused around half to leave the industry), a daily price cap of 0.8% of interest charges and a cap on default charges to £15.
The cost measures were introduced to ensure that a customer never repays double what they have asked to borrow, limiting top ups and extensions too.
The result of tough restrictions has led to a more competitive market, with lower margins and only around 50 lenders still active in the industry.
Increase in claims
Following the increase in regulation, there has been a wave of former borrowers who are looking to claim compensation for mis-sold loans. This is on the basis that they were provided high cost loans without the lender carrying out adequate checks and were given loans that they could not repay. Individuals that fall under this bracket include those with very poor credit histories, recent CCJs, the unemployed and those on benefits.
There have been thousands of successful claims made with payday loan giant Wonga.com who have since issued over £220 million worth of compensation. This has led to a significant fall in profit and the once promising company reported last month that it is going into administration and no longer taking applications.
Elsewhere, payday lender Quickquid was forced to repay £1.4 million in compensation and The Money Shop has around 5,000 cases currently in progress, likely to cost over £5 million in claims.
What does the future hold?
The future for payday loans in the UK is looking cloudy, with lenders needing to be extra cautious with who they lend to and being conscious of a rise in compensation claims.
Subsequently, lenders are starting to move away from the traditional product to more flexible loans from the likes of Uncle Buck and MY JAR that are repaid over 3 to 24 months, giving the customer more breathing space and time to get their finances in order.
Elsewhere, we could see continuously lower margins for payday lenders and brokers in spite of a very strong demand for the product with around 3 million applicants in the UK each year.
We may also see an emergence of new alternatives including online overdrafts, top up facilities and loans with a guarantor to assist those with poor credit histories.