What Are The Regulations For Payday Loans in The UK?

When the Financial Conduct Authority took over as the City regulator for consumer finance in 2015, there were a number of changes introduced to the way payday loans and other financial products were regulated in the UK.

Previously, the industry was regulated by The Office of Fair Trading and it followed a very relaxed form of self-regulation. This caused a firm response by the FCA to introduce strict rules to encourage responsible lending and treating customer fairly outcomes for the 2 million people that use payday loans in the UK each year.

The rules apply for both brokers of payday loans (such as price comparison websites, pingtrees, lead generators) and also direct lenders.

At a Glance:

• Lenders and brokers must be FCA authorised through a formal process

• A daily price cap of 0.8%

• A default rate cap at £15

• Borrowers cannot repay double their loan amount

• Proper credit and affordability checks must be run

• Payday loans are not 3 months minimum

• Clear advertising rules

• Responsible collection practices

Lenders and Brokers Must Have FCA Authorisation

To offer payday loans in the UK, operating firms must have FCA authorisation and this process can take 6 to 18 months to be approved depending on the complexity of your business (brokers are faster, lenders are longer). This process requires a full due diligence of your business plans, motives, shareholders, financial reserves, forecasts and more. 

You can follow the FCA guidelines from the website and submit your application online. Most people use the help of a solicitor or FCA consultant to ensure a smooth and fast process. The FCA will typically take a few weeks to respond to your application and it is possible that your application can be rejected, in which case you can submit a fresh one or make amendments to be reviewed.

However, no broker or lender can operate without full FCA authorisation and this information must be clearly displayed on your website footer and in your loan documentation. You can operate as an Appointed Representative (AR) under the license of another authorised firm.

0.8% Price Cap on Daily Interest Rates

A significant introduction made by the FCA is that lenders can only charge a daily interest of 0.8% per day which is price capped and the rate cannot exceed this.

Previously, payday lenders had no limit on the amount they could charge and this was typically around the 1% per day rate.

Operating at this fixed rate is certainly harder for lenders and it makes their margins a lot smaller. But it is certainly peace of mind for consumers knowing that they will not pay more than this rate.

Cap on Default Rates

For customers that are unable to repay their loan or miss a repayment, the default charge has been capped by the FCA at £15.

This means that whenever a payment is missed and goes into arrears, a charge no greater than £15 will be applied as a late fee.

Before the FCA came into power, this rate was not capped by lenders and was often at £30 or £50 and some lenders would offer unsuitable loans to push struggling borrowers into arrears.

Today, this rate cannot exceed £15.

Cannot Pay Double The Amount Borrowed

As part of the price cap, it ensures that no borrower will repay double the amount that they have borrowed.

For instance, a £300 loan will never cost more than £600, assuming that it is a payday loan. The regulation insists that caps are in place to protect consumers for high rates that are unaffordable.

Moved From a 1-Month to 3-Month Product

The traditional payday loans product would typically last for around 1 month, whereby the customer borrows an amount of £200 or £300 and pays back the full loan and interest on their next payday from work, typically the last working day of the month. 

However, in light of recent regulation, the product has shifted towards a 3 month loan or 90 day loan, giving customers a little longer to get their finances in order and the flexibility to repay their loan over time. This longer, instalment loan option tries to encourage responsible lending and avoid the need for customers to repeatedly borrow loans month-after-month, which was often the case with payday loans.

Advertising Rules

To be FCA compliant with recent rules, payday loan companies must have clear advertising on their websites which includes:

• A representative example (the rates offered to at least 51% of customers)
• A repayment example
• A warning label which reads: Warning: Late repayment can cause you serious money problems. For help, go to moneyhelper.org.uk
• A mention and link of where they are listed on a PCW – price comparison website, to giving customers the opportunity to find cheaper loan alternatives

Lenders Must Carry Out Credit Checks and Affordability Checks

The FCA requires all payday lenders to carry out sufficient credit checks and affordability checks before approving and funding a loan. 

This is to ensure that all customers can repay their loans without falling into financial difficulty and loans are not given to people under difficult circumstances.

The FCA routinely carries out spot checks and audits on payday lenders and they often check every application and customer that was funded and how the lender justifies using the checks to approve their loan.

Beforehand, credit checks were encouraged by the regulator, but were not mandatory or checked thereafter.

Ease With Struggling Borrowers

When it comes to collection practices, payday lenders today are required to offer forbearance and patience with those borrowers who have missed repayment or who are struggling to repay.

Practices include:

• Limiting the number of times they can contact a customer in arrears
• Limiting the number of times that they can try collect from a borrower’s account
• Offering pay plans and arrangements to help fledgling borrowers