Who Are The Regulators In The Financial Industry?
The Bank of England and Financial Conduct Authority are the leading regulators within the banking industry, whilst the PRA (Prudential Regulation Authority) is a division within the BoE. The Bank Of England’s role is to regulate other commercial banks, building societies, credit unions, insurance companies and major investment firms. The PRA governing body was implemented to protect policy holders and provide some financial security to individuals. One of the major regulations that has been rolled out recently is the ‘Ring Fencing’ rules. This makes it safer for a retail banks to lend money because their service will be separated from the corporate arm of the bank and accounts will have been broken down and separated to reduce risk. These rules were implemented in January 2019 and were designed to prevent another global financial crisis, like the credit crunch of 2007.
The Bank Of England’s PRA authority also helped to bring a stop to the miss-sale of PPI, which is now heavily supervised and monitored by the FCA and BoE. It is important to have a regulator in order to prevent a domino effect of collapse of the financial market in the UK, but also to protect consumers.
The FCA ensures all banks and lenders adhere to a strict criterion of ethical lending. The FCA is also in charge of monitoring any monopolisation of the financial market and managing consumer complaints when a bank or financial institution has mismanaged services or a particular case.
How Payday Loans Fit Into The Finance Industry
Payday loans have been around for decades but experienced a surge as a likely result of the global financial crisis of 2008. A payday loan specifically fills a gap in the financial industry, whereby it provides individuals with a small value loan on a seemingly temporary basis. The immediacy of the money made payday loans very accessible, particularly before 2013. When FCA regulators started to oversee lending behaviour, the FCA introduced market-wide restrictions and limits on lending.
Payday loans are classified by the FCA as High Cost Short Term Credit. To qualify as HCSTC, a credit agreement (loan) must adhere to the following criteria:
Other HCSTC products and services include:
- Home-Collected Credit
- Catalogue Credit
- Some rent-to-own
- Logbook Loans
Payday Loans Market Investigation
The Competition & Markets Authority (CMA) investigated the payday loan market after criticism by a number of bodies. This includes the Citizen’s Advice charity that provides free, supportive legal services for those with consumer complaints, debt issues and so many other concerns. The network of Citizen’s Advice charities found that 70% of lenders were not doing enough to explain the loan to a consumer, resulting in a domino effect of debt.
This study influenced the CMA investigation and the subsequent regulations that came into practice in 2015.
Regulations and Why They Were Put In Place
- Introduce a £15 cap on default fees
- Interest rate on loans capped at 0.8% a day
This regulation was implemented to help individuals escape the loan cycle. One report highlights that £57 was repaid each month of a loan amount of £500, but the individual still owed £437 after a six month period.
Before the price cap was introduced, HCSTC loans typically cost consumers over £100 per loan. This is a particularly high fee when the average amount borrowed for a short term loan was £260. Default rates in 2014 were around 15%, arrears rates in 2015 were around 17% and around 50% of HCSTC lenders’ revenue came from interest and charges for late payment or default, encouraging poor lending behaviour and many non-reputable lenders taking advantage of those in vulnerable positions. The caps help people take out a loan and pay their debt off, completely, within a suitable timeframe.
After The Price Cap:
- After the cap, HCSTC loans typically cost consumers around £60 per loan
- Default rates have decreased to 5%
- Arrears rates post price cap (2016) were around 19%
- 20-25% of HCSTC lenders’ revenue came from interest and charges for late payment or default
- Citizens Advice report a 60% drop in the number of HCSTC-related issues & 30% drop in issues related to high-cost credit areas.
- Borrowers must never have to pay back more than 100% of the loan amount
This simply means when an individual borrows £200, their repayments will not exceed £400, total.
- Must list their loan rates on at least one price comparison site
- All lenders must display a risk warning
- Lenders have to provide information about how to get free debt advice
The 2015 regulations focused heavily on lenders actively promoting alternate routes for financing, and the risks of a payday loan. As standard, the information should be readily available to all consumers. However, these regulations only apply to those who have rolled over on a loan.
The FCA sets two criteria for HCSTC lenders:
- Ensure that firms only lend to borrowers who can afford it
- To increase borrowers’ awareness of the costs and risks of borrowing unaffordably and ways to get help if they have financial difficulties
Other regulations include:
- Provide existing customers with a summary of their cost of borrowing
- Loans can only be rolled over twice before the balance is due
- Lenders are limited to two failed CPA (Continuous Payment Authority) attempts
- Lenders can only take payment via CPA if there is enough money in the account to cover the full payment
How Have These Regulations Changed The Industry?
The payday loans industry was forced to adhere to criteria that benefited the consumer. This means that the number of firms offering loans comparing 2016 to 2018 has dropped by 16.98% as lenders are having to be increasingly compliant – many of whom are unable to adhere to the guidelines put in place by the FCA. In two years, the number of firms went from 106 to 88, and big-name lenders such as Wonga were amongst the firms that could not comply with the regulations. Despite loan numbers steadily increasing, with some quarterly drops and increases:
Number Of Loans
Q3 2016 – 1,177,749
Q4 2016 – 1,107,448
Q1 2017 – 1,087,583
Q2 2017 – 1,259,714
Q3 2017 – 1,301,061
Q4 2017 – 1,353,350
Q1 2018 – 1,316,501
Q2 2018 – 1,456,993
The debt charity, Step Change, also investigated the success of the regulations. They reported that the regulations saw improvement, but also adaptation. Many providers changed their policy to an instant loan, which can work out more expensive, as payments are made over 3-6 months.