Payday Lenders Required to Feature One Price Comparison Website
A new rule in the payday loans industry now requires all lenders to feature on at least one price comparison website in the UK and to display a link to it “prominently” on their website.
The aim is to encourage prospective borrowers to compare the cost of loans before applying – and see how that specific lender compares respectively to others in the market.
The new ruling which came into place last week, was formed by the Competition and Markets Authority (CMA). Their decision initially dated back to 2015, following a 20 month review of the industry.
About The Ruling
The CMA says the new rules will:
- Let customers compare loans easier and establish the best value
- Offer borrowers a clear explanation of fees and charges and make the cost of missing repayments much clearer
- Allows new lenders to compete with existing players on price
The ongoing work of the CMA and Financial Conduct Authority is based on increasing consumer information and confidence in the payday loan industry – one that has been heavily criticised over recent years for charging usurious rates of interest and responsible for over 3,000 complaints in Q1 of this year. (Source: BBC News)
The CMA state that an active comparison of products shows that the lender is competitive and can allow the borrower to save up to £60 per loan by finding a cheaper provider.
The idea of showing their competitiveness against new providers is welcomed, especially since there are now cheaper alternatives trying to undercut the market by offering extended credit lines instead of high-cost short term loans.
What Other Regulatory Measures Have Been Taken?
The impact of price caps and further regulation in the payday loans industry has led to 600,000 less loans being funded in the last two years.
Price cap: This was the first major action introduced by the Financial Conduct Authority when they took over from the Office of Fair Trading in 2014. The price cap of 0.8% per day was introduced on 1st January 2015 and means that it is the maximum that lenders can charge. Before that, most payday lenders charged around 1.0% with some pushing the boundaries are charging higher. With this cap in place, it emphasises that customers will not be able to repay double the amount that they have borrowed and their repayment should sit around the £124 per £100 borrowed mark.
Default charges: For those customers struggling to keep up with repayments, there is now a maximum one-off default charge of £15. Although it depends on the lender, the borrower typically needs to be in arrears for around three days in order for the charge to be applicable.
In the past, there was no limit and lenders would charge larger amounts (£30 and higher) and they could continue to do so on several occasions. This cap limits customers that are already struggling by falling into more debt.
FCA Authorisation Required: A further introduction of the Financial Conduct Authority was to require all participating lenders and brokers to apply for official authorisation. This lengthy process requires a lot of administration and checks to ensure that those running the credit companies and their employees are ‘fit’ and ‘responsible.’ Plus, there is a cost incurred for simply applying, regardless of whether your application has been successful. The result has led to competent firms receiving authorisation and several irresponsible lenders and brokers to leave the industry.
Moving To A 3-Month Loan: The FCA have made lenders move from offering a payday loan to a product that is a minimum of 3 months. This is designed to give customers the breathing space to repay in monthly instalments, rather than being stretched to repay at the end of the month. Whilst lenders can still technically offer payday products, it is minimum of 3 months and to make it payday, the customer can simply choose to clear their account early. This also has a psychological impact to move away from the idea of “payday” to something associated more with instalment and personal credit.
Good Examples Of Lenders Showing Comparison Websites
Below we show how some payday lenders have responded to the new legislation and are clearly showing the link to comparison websites:
Pounds to Pocket
What’s Next For The Payday Industry?
The FCA have stated that they are still investigating the payday sector, suggesting that more regulation could be coming. There are talks of a further price cap to lower the rate to below 0.8%. The FCA already penned an idea two years ago of only having 3 to 4 lenders in the entire industry and whilst this has yet to be materialised, it could still be their long term plan.