Posted: 8th January 2015

Remember last November’s ‘Black Friday’? Images of customers clutching televisions like they were going out of fashion, shielding their wares like irate bears guarding their cubs.

Whether the deals available were in fact ‘fantastic’ as opposed to us all becoming enveloped in an ingenious marketing ploy, together with the best Christmas song of all time, was probably one to debate at December’s Christmas dinner table.

No doubt in part due to the success of Black Friday, the British Retail Consortium (BRC) stated that total retail spending was 2.2 percent higher in November compared with the same month the previous year. Success, but at what price? The draw of Black Friday’s ‘mind-blowing’ deals as well as the pressures of a magical Christmas and exhilarating New Year undoubtedly placed pressure on customers to spend, spend, spend. Many will have turned to payday lenders for temporary finance, often with little thought of the considerable fees they may incur later on.

New rules which have been introduced this month, will however provide some assistance to borrowers as the FCA looks to curb seemingly excessive fees and cap interest rates to protect consumers. These rules are yet another example of the mounting trend from the FCA to target the payday loan market.

Payday past

Though we never quite expected the riotous behaviours of Black Friday, everyone had seen this cap coming. To set the scene, in April, on the first day the FCA took over consumer credit regulation, a thematic review was launched to review debt collection practices of payday lenders. In May, the FCA warned all consumer credit firms to raise their advertising standards, but picked out high-cost lenders, focusing disproportionately on the benefits and a general lack of transparency of product fees and risks. Wonga have had to bear the brunt of the regulator’s enforcement powers on two occasions; compensating customers for unfair and misleading debt collection practices, as well as failing to ensure repayment plans were sustainable.

Payday present

There is no sign of the FCA’s focus diminishing; CEO Martin Wheatley has been clear in his intention to help “people who struggle to repay debt” and “put an end to spiralling payday debts”. As of this month, borrowers are liable for a maximum repayment of no more than double the original loan, rather than seeing uncapped interest rates force debts far above the amount borrowed. In addition to this, daily interest rates and charges have been capped at 0.8% alongside a maximum £15 one-off default fee.

What lies ahead?

So with these measures now in place, what does the future hold for payday lenders? These rules threaten the very existence of a vast majority of the UK’s 400 payday lenders. Undoubtedly, business models and strategies will have to be modified to meet the requirements and minimise the adverse impact on profit levels. In all likelihood, a number of firms will exit the market.

It’s not only the FCA that payday lenders (and brokers) have to watch out for. There is also a keen interest at government level with the Competition and Markets Authority (CMA) proposing a number of measures designed to help competition in this market work effectively; most poignantly ensuring the price cap doesn’t become a ‘going rate’, and encouraging the development of a high quality price comparison website.

Whilst the caps were introduced to protect the majority of customers, there is a fear that those who do not meet affordability checks, particularly the desperate and vulnerable, could be forced to resort to less legitimate means to obtain the money they need.

Both the FCA and the CMA have objectives to protect consumers and promote effective competition. It is not within either’s interest to create an oligopoly in the market. The FCA hopes that any significant shortfall of providers will be taken up by high street banks, credit unions, employers or families.

The cap on fees has kicked off what will be a very telling 2015 for the market. As authorisations progress, regulatory reviews continue and business models transition, the payday loan market in 2015 will be rather different compared to its current form.

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