When the Financial Conduct Authority (FCA) takes over regulation of the consumer credit market on 1st April payday lenders and all other companies providing credit facilities will be forced to check potential clients thoroughly.
Payday lenders must ensure borrowers can pay back loans
Payday lenders will be obliged to check that all customers applying for a short term loan can in fact afford to pay the loan back. They will not be allowed to give a short term loan to any customer who cannot pay the loan back. New rules to be introduced by the FCA are aimed at cracking down on poor practice among lenders.
Legitimate, registered, short-term lenders in the payday loans industry have been struggling in a market inundated with lenders who are not registered and who do not follow good practice guidelines. Legitimate payday lenders welcome any rules introduced to clean up the payday loans market.
Rolling over short term loans more than twice will be banned
Consumer credit companies will also be banned from rolling over loans more than twice. This ban is to protect vulnerable customers from becoming too deeply entrenched in debt that they cannot extricate themselves from. Lenders will also be obliged to provide all customers with information on how they can obtain advice and information on how they can become debt free. The new FCA regulations are hailed as the biggest overhaul of the consumer credit market about four decades.
Also included in the new FCA rules will be a regulation on how many times a company offering short term loans can use a continuous payment authority (CPA) to draw money from a customer’s account. Currently a payday lender can use a recurring CPA but in future the CPA will only be allowed to be used twice.
All companies supplying credit will be affected
All companies who supply credit and anyone applying for credit in the UK will be affected. The number of firms under the FCA’s watch is expected to triple once the transfer of consumer credit regulation from the OFT is completed.
A lot of focus has been on payday lenders and payday lending; that is short term unsecured lending, it must be noted that these rules will not only affect the payday lending industry. All companies providing credit from retail store cards to dental practices and second-hand car dealerships will be affected by the new FCA rules.
The new regulations to be imposed by the FCA will not only protect the consumer applying for short-term finance but it will also protect all transparent, legitimate and registered companies offering short term finance. By doing strict credit checks the finance companies face less risk of default by a customer. The payday lenders are particularly at risk since they give unsecured loans so if a customer defaults they have little recourse. Customers will also receive direct benefits if their short term loans are repaid earlier. Rolling over loans incurs heavy costs for the customer.