Despite careful planning of your finances, it is always possible that an unexpected expense could leave you struggling until payday. For those who do not have access to savings or traditional forms of credit, such as overdrafts and credit cards, this can lead to a financial emergency. This is especially true for those with a […]
Who Are the FCA?
When seeking financial services from reputable lenders, you are likely to come across mentions of the Financial Conduct Authority (FCA). If you don’t know what the FCA is, then this article will tell you everything that you need to know. Essentially the FCA is a regulatory body that ensures financial service providers adhere to specific conduct. The FCA ensure that the payday loan industry is fair for borrowers and enforce responsible lending and fair contracts between lenders and borrowers.
When Was the FCA Formed?
The FCA was formed in 2014 to enforce fairer lending in the financial industry. Before their existence, regulation fell to the Office of Fair Trading (OFT) and the Financial Services Authority. It was clear however that these regulatory bodies weren’t enough to regulate the financial industry alone. Following an OFT investigation focusing on payday loans in 2012, many companies were issued warnings regarding their lending behaviour. Soon after this, several lenders lost their licenses and were later shut down completely. The investigation also led to a further 14 companies choosing to cease trading voluntarily within the year. The OFT operated from 1973 until being disbanded in 2014, their responsibilities were then shared between various organisations including the FCA.
Understanding the Financial Services Authority (FSA)
The FSA regulated financial services between 1997 and 2013 but due to a lack of resources, its work wasn’t as effective as it could have been. The FSA was responsible for regulating many areas but its lack of resources meant that some of these areas were overlooked, giving some lenders much more freedom than they likely should have had. In 2010 it was clear that the FSA was unable to effectively handle the regulation of financial services and the Chancellor of the Exchequer concluded that reform was needed. The FSA ceased to exist from the 1st April 2013, following the creation of the Financial Services Act 2012. This meant that the FSA’s responsibilities were delegated to two new regulatory bodies, the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA).
The PRA was given the responsibility of regulating insurers, banks, investment firms, building societies and credit unions. This meant that the FSA’s previous regulatory responsibilities were not delegated solely to one financial regulatory body. By being split between two regulatory bodies, the regulation of financial services becomes simpler and more effective, giving greater protection to the consumer/ borrower.
As regulation of banks, insurers and other financial services were covered by the PRA, the FCA was able to focus its efforts on wholesalers, retailers, financial markets and other entities that were not delegated to the PRA, including payday loan lenders. The FCA works closely with the PRA to provide a comprehensive and effective regulatory service for the financial services sector.
The FCA and Payday Loans
The FCA has numerous roles in the regulation of financial services, but its main focus is to ensure fair contracts are provided to consumers and borrowers. This means that it is able to control how financial products such as payday loans or same day loans are marketed and set minimum standards for lenders. By doing so, the FCA can promote healthy competition in the financial industry while also increasing public trust in lenders. Regulations surrounding the marketing of financial products like payday loans ensure that lenders provide key information to borrowers and that the advertising of these services adhere to specific rules. By following these regulations, lenders can be sure that they are both lending responsibly and promoting public trust in their services.
The Positive Impact of the FCA
The introduction of the FCA has seen significant changes in the financial services industry. By promoting responsible lending and enforcing strict regulations on lenders, the FCA has transformed the financial lending market. As a result of this, many lenders that took advantage of the lax regulations that were in place when the FSA was responsible for regulation have been wiped out overnight. Payday loans companies were cropping up at an unprecedented rate when under the FSA, often with unfair practices that landed borrowers in unreasonable amounts of debt that they were unable to pay. These lenders often provided loans to those that couldn’t afford to pay them back and created debt recovery companies to recoup their losses. Many of these were intimidating and unreasonable to borrowers.
Due to the lack of resources that the FSA had, several financial scandals slipped through the net. The payday loan scandal, the mis-selling of PPI and the UK banking crisis all happened under FSA regulation. By reforming regulation, these financial services became easier to manage. The FSA essentially had too many responsibilities and not enough funding and resources to successfully manage these, which is what highlighted the need for reform. Issues of conduct were often missed as the FSA was forced to focus on large corporations and institutions in the heat of the UK banking crisis. Many consumers were forgotten, leaving irresponsible lenders to essentially create their own rules.
The FSA’s experience was a learning curve in financial regulation. The issue highlighted the need for regulation that focused on the needs of the consumer, which was why the FCA was formed. The FCA focuses mainly on conduct and protecting consumers.
Specific Regulatory Changes to the Payday Loan Industry
Following the OFT investigation into payday loans, there have been many changes since the introduction of the FCA. These changes reflect the needs of the consumer and are in place to protect borrowers from entering financial hardship as much as possible.
Payday Loan Charge Caps and Marketing Restrictions
Previously, payday loan companies were able to charge unreasonable fees to lenders, which often left them in a trap of unmanageable debt. The FCA introduced caps on the amount loan providers can charge borrowers. These currently stand at a daily interest cap of 0.8% per day and default charges are capped to £15.00 per day. Additionally, the total loan costs cannot exceed 100% of the amount that was initially borrowed. For example, a £1,000 loan cannot be subjected to total loan costs of more than £2,000.
As discussed, the FCA control the marketing of financial products. These regulations can now clearly be seen in advertisements by payday loan companies in the form of warnings of the risks associated with taking out a high-interest short-term loan. For example, advertisements must state that late repayments can result in money problems and highlight the risk that comes with borrowing money under these terms.
Restrictions on CPA and Rollovers
Most borrowers enter a financial agreement with their payday loan lender that allows the lender to collect repayments using Continuous Payment Authorities (CPA). A CPA provides the lender access to the bank account of the borrower and enables them to collect repayments without the need for separate agreements each time. CPAs can be cancelled by borrowers but the borrower must provide alternative payment options if they wish to cancel.
In the past, lenders were able to make numerous attempts to collect repayments from the borrower’s bank account but it was clear that this approach could result in borrowers being unable to manage their finances effectively and miss bill repayments or be unable to meet other living costs. Because of this, the FCA set regulations around the collection of repayments via CPAs. A lender can now only attempt to collect the repayment from the borrower’s bank account twice, after two unsuccessful attempts they must contact the borrower and arrange repayment via other means.
Loan rollovers became commonplace prior to the FCA’s intervention in 2014, with many people choosing to rollover their loan several times. However, this is not a responsible way to lend and can result in borrowers taking unnecessary financial risks. The FCA introduced rollover restrictions in July 2014, that means borrowers can only rollover or extend their loan a maximum of two times. Before rolling over or extending a loan, lenders must now provide borrowers with debt management advice and information that can enable them to make better financial decisions.
Responsible lending with the Financial Services Register
The Financial Services Register is a register that was introduced by the FCA to ensure that lenders that still wished to trade were able to follow strict rules and regulations surrounding lending. The introduction of this register meant that the companies that thrived by using irresponsible and immoral practices would be easily exposed, and likely result in their abolishment. All payday lenders were instructed by the FCA to reapply for reauthorization regardless of whether they had been authorised by the Office of Fair Trading. The register contains the names of all companies that are regulated by the FCA and PRA and by enforcing this re-registration, the FCA was able to check that all existing companies were meeting stricter regulations.
For consumers, the Financial Services Register offers peace-of-mind that lenders are being thoroughly regulated and must meet high conduct standards. Many short-term loan providers chose to close shop once the FCA had taken charge of regulation, others were refused authorisation. This highlights that many companies providing short-term loans to consumers in the past were doing so in either an unfair, immoral or even illegal manner. Those that are left in the market after the introduction of the FCA are the lenders that embraced the new regulations and committed to responsible lending.
The Financial Services Register contains information about lenders that is publicly available. All authorised lenders will be on the register with their trading names and contact information in order for consumers to search lenders for reassurance before taking on a payday loan. Furthermore, the register also contains information about companies that are operating illegally and without authorisation if the FCA has been made aware of their existence. This means that members of the public are able to search for a lender and see whether they have been operating without authorisation or whether there are scams associated with them.
It is recommended that anyone considering a short-term loan should search the register before committing. Those that are unhappy with services that they have received from registered lenders are also able to contact the Financial Ombudsman where they will be provided with advice, support and information. The Financial Ombudsman should also be contacted by anyone that believes they have taken out any financial products from an unauthorised lender.
Is the FCA Here to Stay?
The FCA currently regulates over 50,000 companies, many of these are short-term lenders. It is clear that the FCA has positively transformed the short-term loan market. Borrowers can now be sure that any financial services that they require are well-regulated and have the means to confirm this. As the financial industry adapts it is likely that the FCA will too, they are committed to providing responsible lending opportunities and adapt their practices accordingly. The FCA benefit lenders substantially by promoting a sense of trust in the financial services sector, where before borrowers were unsure whether the lenders they were dealing with were legitimate, they can now be sure that they are only borrowing from reputable lenders.
Advice for Consumers
When taking out a payday loan or other short-term loan, be sure that it is the best option for you. You must be sure that you will be able to make the monthly repayments that you agree to when taking out a loan. It can be useful to use a budget calculator to work out how much you can afford to spend on loan repayments each month before committing to a loan. You should also be sure to check the Financial Services Register before agreeing to take a loan out with a lender. Responsible lending is something that the FCA and lenders should actively promote, but you also need to ensure that you are borrowing responsibly. Always read the terms and conditions associated with financial products and if you don’t understand these ask for clarification or advice. It is important to remember that loans are often subject to charges and interest, so this information must be factored into any borrowing decision that you make.