Through 2013 and 2014, the Payday loans sector was placed under increasing scrutiny for the perceived bad customer outcomes that were being evidenced. It’s very hard to argue with some of the facts about the payday sector, with record levels of complaints (66%) being upheld by the Financial Ombudsman. (http://www.financial-ombudsman.org.uk/publications/ombudsman-news/123/123_charts.pdf)
To combat some of the very serious issues that have been identified, the FCA have developed a suite of rules and regulations that lenders in the market must abide by. The regulators have also used a consistent statement about companies trying to ‘game the system’ by operating at the absolute edge of acceptable behaviour.
Generally, it appears that most companies are following the new requirements by the letter of the law, although not always to the spirit. It is also not always clear that the interpretation of these rules has definitely worked in the favour of the customer.
One of the FCA’s key initiatives was to restrict the use of rollovers (where a payday loan is simply extended month after month, with interest accumulating all of the time) to a maximum of 2 times. Generally this is a good concept, but some lenders appear to be using this rule in a strange way. One lender appears to have moved out of the single instalment ‘payday’ sector by changing their offering to a monthly instalment loan. A quick glimpse at the example repayment schedule would leave you questioning how this ‘instalment loan’ was in fact anything other than a ‘payday’ loan with two rollovers automatically built in:
It’s hard to see how this example is what the FCA were aiming at when looking to improve the outcomes for customers.
Another example of questionable practice is the charging of different rates for different loan terms and amounts. Whilst inevitably there will always be a point where different charges come into effect (this is true across all of financial services), one particular lender offers 5 different permutations (ranging from 0.35% per day to 0.8% per day). The cynical view is that this is being done so the lender in question can get just beneath the FCA price cap and comply with the regulations. It certainly doesn’t make the situation any clearer for an often financially uneducated society and makes comparing products much more difficult as a decision to increase a loan amount by £50, or to extend the loan term by as little as a few extra days could mean consumers having to start their comparison across providers.
In a market where, contrary to the regulators desires, speed and ease of access are often considered higher priorities than overall value or comparing the best deal between two providers, it is very likely that consumers will not pay close attention to these factors. It stands to reason therefore where there is clear evidence some lenders are doing everything they can to maximise their return and customer focus appears to be taking a back seat, customer outcomes will not always be as good as they could be.
So whilst traditional ‘payday’ lending may be on the decline, it appears clear that some lenders are offering new short term products that almost certainly meet the letter of the law, yet probably don’t meet the spirit of the law and certainly don’t guarantee a better customer outcome than a payday loan.
So in much the same way as before the regulations came into effect, it remains crucial for the customer to research the market and the provider to ensure that they know what they are getting and that they are getting the best deal. This can’t have been what anyone at the FCA set out to achieve so it will be interesting to see what happens in the coming months.