Achieving Safety and Affordability in the UK Payday Loans Market
- 910 Downloads
In the aftermath of the global financial crisis, financial regulation and supervision has been significantly reformed in the UK. As an important part of this reform, consumer credit, including payday loans, has been transferred to the new conduct of business regulator and supervisor, the Financial Conduct Authority. This paper considers the key rules on responsible lending and product regulation, introduced to protect the payday loans consumers. It shows that the responsible lending regime now reduces the risk that payday loans will be given to those who cannot afford the high costs involved, although responsible lending will only be fully effective if credit reference agencies hold up-to-date and correct information. Product regulation, in the form of a rollover restriction and a price cap, should make payday loans cheaper and safer for those who do use them, although, for the price cap to be most effective, steps must be taken to enhance price competition in the space below the cap. Finally, it is shown that firms are now subject to interventionist, rigorous, and consumer-centric supervision, which seems to stand a good chance of securing compliance with the new rules.
KeywordsConsumer credit Payday loans Financial Conduct Authority Responsible lending Product regulation
The author is greateful to Professor C. Willett (University of Essex) and the three anonimous reviwers for helpful advice and comments. The author also thanks Professor R. Lastra, Dr M. Goldby and Dr C. Russo for advice on earlier versions of this work carried out during LLM studies at Queen Mary, University of London. All mistakes remain the responsibility of the author.
Conflict of Interest
The research has not received external funding, and to the best of my knowledge, neither are there any other possible sources of conflict of interest. The research is my independent work and has no connection with the Oxford Citizens Advice Bureau.
The research has not involved human participants or animals.
- ASA. (2014). ASA adjudication on WDFC UK Ltd/Wonga, http://asa.org.uk/Rulings/Adjudications/2014/4/WDFC-UK-Ltd/SHP_ADJ_246696.aspx#.VM5vsdKsWh0. Accessed 28 January 2015
- Ben-Shahar, O., & Schneider, C. E. (2010–2011). The failure of mandated disclosure. University of Pennsylvania Law Review, 159, 647–749.Google Scholar
- Bertics, M. (2005). Fixing payday lending: the potential of greater bank involvement. North Carolina Banking Institute, 9, 133–158.Google Scholar
- Competition and Markets Authority. (2014a). Payday lending market investigation, provisional findings report. London: competition and markets authority. https://assets.digital.cabinet-office.gov.uk/media/539b1d16e5274a103100000a/PDL_PFs_main_report.pdf. Accessed 28 Jan 2015.
- Competition and Markets Authority. (2014b). Payday lending market investigation, provisional decision on remedies. London: Competition and Markets Authority. https://assets.digital.cabinet-office.gov.uk/ media/5435a640ed915d1336000005/Payday_lending_PDR_and_appendices.pdf accessed 28 Jan 2015.
- Ellison, A., Whyley, C., Forster, R., & Jones, P. A. (2011). Credit and low income consumers; a demand-side perspective on the issues for consumer protection. Dorking: Friends Provident. http://www.friendsprovidentfoundation.org/credit-and-low-income-consumers-a-demand-side-perspective-on-the-issues-for-consumer-protection/. Accessed 28 Jan 2015.
- Europe Economics. (2013). A new consumer credit regime: benefits, compliance costs and firm behaviour. London: Europe Economics. http://www.europe-economics.com/publications/final_europe_economics_report_03-10-13.pdf. Accessed 8 March 2014.
- Experian. (2013). Payday loans data. http://www.experian.co.uk/assets/consumer-information/case-studies/Payday%20loan%20data%202.pdf. Accessed 22 July 2014.
- Faller, B. D. (2008–2009). Payday loan solutions: slaying the hydra (and keeping it dead). Case Western Reserve Law Review, 59, 125–160.Google Scholar
- Financial Conduct Authority. (2013a). The FCA sets out in detail how it will regulate consumer credit, including payday lending, when it takes over responsibility in April 2014, Press release, 3 October 2013. London: Financial Conduct Authority. http://www.fca.org.uk/news/firms/consumer-credit-detail. Accessed 28 Jan 2015.
- Financial Conduct Authority. (2013b). Reader’s Guide: an introduction to the Handbook, December 2013. London: Financial Conduct Authority, Bank of England, Prudential Conduct Authority. http://www.fca.org.uk/static/documents/handbook/readers-guide.pdf. Accessed 28 Jan 2015.
- Financial Conduct Authority. (2014a). Proposals for a price cap on high-cost short-term credit, Consultation Paper, CP 14/10, July 2014. London: Financial Conduct Authority. http://www.fca.org.uk/your-fca/documents/consultation-papers/cp14-10. Accessed 28 Jan 2015.
- Financial Conduct Authority. (2014b). Detailed rules for the price cap on high-cost short-term credit Including feedback on CP14/10 and final rules, Policy Statement, PS 14/16, November 2014. London: Financial Conduct Authority. http://www.fca.org.uk/news/ps14-16-detailed-rules-on-the-price-cap-on-high-cost-short-term-credit. Accessed 28 Jan 2015.
- Financial Conduct Authority. (2014c). Guide for consumer credit firms. London: Financial Conduct Authority. http://www.fca.org.uk/static/documents/consumer-credit-being-regulated-guide.pdf. Accessed 28 Jan 2015.
- Financial Conduct Authority. (2014d). Wonga to pay redress for unfair debt collection practices, Press release, 25 June 2014. London: Financial Conduct Authority. http://www.fca.org.uk/news/wonga-redress-unfair-debt-collection-practices. Accessed 28 Jan 2015.
- Financial Conduct Authority. (2014e). Wonga to make major changes to affordability criteria following discussions with the FCA, Press release, 2 October 2014. London: Financial Conduct Authority. http://www.fca.org.uk/news/wonga-major-changes-to-affordability-criteria. Accessed 28 Jan 2015.
- Gleeson, S. (2014). Regulatory process—authorization, supervision, enforcement. In G. Walker & R. Purves (Eds.), Financial services law. Oxford: Oxford University Press.Google Scholar
- Goff, S. (2014). Tougher UK rules drive payday lenders away. Financial Times, 20 May 2014. http://www.ft.com/intl/cms/s/0/141899d6-dcf6-11e3-ba13-00144feabdc0.html. Accessed 28 Jan 2015.
- Goode, R. (1982). A comparative outlook: moneylending and its regulation. Usury in English law. Arizona Journal of International and Comparative Law, 1, 38–60.Google Scholar
- Hanson, T., Bolling, K., Fu, E., Thomas, A., & Sullivan, S. (2014). Research into the payday lending market. London: TNS BMRB, Competition and Markets Authority. https://assets.digital.cabinet-office.gov.uk/media/5329df8aed915d0e5d000339/140131_payday_lending_tns_survey_report_.pdf. Accessed 22 July 2014.
- HM Treasury, & Department for Business, Innovation and Skills (2013). ‘A new approach to financial regulation: transferring consumer credit regulation to the Financial Conduct Authority. London: HM Treasury and Department for Business, Innovation and Skills. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/221913/consult_transferring_consumer_credit_regulation_to_fca.pdf. Accessed 22 July 2014.
- Jones, R. (2014) Wonga to pay £2.6 m compensation for fake debt firm letters, The guardian, 25 June 2014. http://www.theguardian.com/money/2014/jun/25/wonga-compensation-bill-unfair-misleading-practices. Accessed 28 Jan 2015.
- Karlan, D., & Zinman, J. (2009). How government can guide small borrowers. Financial Times, 29 April 2009. http://www.ft.com/intl/cms/s/0/775ebc9e-34f6-11de-940a-00144feabdc0.html#axzz3VsEH7cFl. Accessed 28 Jan 2015.
- King, U., & Parrish, L. (2007). Springing the debt trap: rate caps are the only proven payday lending reform, executive summary. North Carolina: Centre for Responsible Lending. http://www.responsiblelending.org/payday-lending/policy-legislation/states/springing-the-debt-trap-exec-summary.pdf. Accessed 22 July 2014.
- Lastra, R. (2006). Legal foundations of international monetary stability. Oxford: Oxford University Press.Google Scholar
- McDermott, J. (2013) We are now all part of the Wonga economy. Financial Times, 5 November 2013. http://www.ft.com/intl/cms/s/0/c80def50-4646-11e3-a0c0-00144feabdc0.html. Accessed 28 Jan 2015.
- Moore, E. (2014) Payday sector is a lightning rod for FCA. Financial Times, 12 March 2014. http://www.ft.com/intl/cms/s/0/3111911a-a9d3-11e3-8bd6-00144feab7de.html. Accessed 28 Jan 2015.
- Morgan, D. P., & Strain, M. R. (2007). Payday holiday: how households fare after payday credit bans. New York: Federal Reserve Bank of New York. http://www.newyorkfed.org/research/staff_reports/sr309.pdf. Accessed 28 Jan 2015.
- Office of Fair Trading. (2013a). Payday lending compliance review, final report, annex A: Quantitative findings’, OFT 1481, March 2013. London: Office of Fair Trading.Google Scholar
- Office of Fair Trading. (2013b). Payday lending. Final decision on making a market investigation reference. OFT 1492, June 2013. London: Office of Fair Trading. https://assets.digital.cabinet-office.gov.uk/media/532ad579e5274a226b000307/payday-MIR.pdf. Accessed 28 Jan 2015.
- Office of Fair Trading. (2013c). Payday lending compliance review, final report, OFT 1481, march 2013. London: Office of Fair Trading. https://assets.digital.cabinet-office.gov.uk/media/532ad55eed915d0e5d00038d/oft1481.pdf. Accessed 28 Jan 2015
- Osborne, H. (2014). Serous debt crisis rise as families struggle with household bills. The guardian, 10 June 2014. http://www.theguardian.com/money/2014/jun/10/serious-debt-cases-household-bills. Accessed 28 Jan 2015.
- Personal Finance Research Centre. (2013). The impact on business and consumers of a cap on the total cost of credit. Bristol: University of Bristol. http://www.bris.ac.uk/geography/research/pfrc/themes/credit-debt/total-cost-of-credit.html. Accessed 28 Jan 2015.
- Ramsay, I. (2010). Regulation of consumer credit. In G. Howells, I. Ramsay, & T. Wilhelmsson (Eds.), Handbook of research on international consumer law, 366–348. Cheltenham, Northampton: Edward Elgar.Google Scholar
- Ramsay, I. (2012). Consumer law and policy: texts and materials on regulating consumer markets. Oxford and Portland: Hart Publishing.Google Scholar
- Reifner, U., Clerc-Renaud, S., & Knobloch M. (2010). Study on interest rate restrictions in the EU, Institut für Finanzdienstleistungen e.V. (iff), Zentrum für Europäische Wirtschaftsforschung GmbH (ZEW), Hamburg/Mainhaim: iff/ZEW. http://ec.europa.eu/internal_market/finservices-retail/docs/credit/irr_report_en.pdf. Accessed 28 Jan 2015.
- Rowe, B., Holland, J., Nash, R., Hann, A., & Brown, T. (2014). Consumer credit research: payday loans, logbook loans and debt management services. London: ESRO. http://www.fca.org.uk/your-fca/documents/research/esro-consumer-credit-research-payday. Accessed 28 Jan 2015.
- Sky News. (2013). Ed Miliband takes on the ‘Wonga economy’. Sky News, 5 November 2013. http://www.webcitation.org/6KwJOvDfX. Accessed 22 July 2014.
- Spector, M. (2008). Payday loans. Unintended consequences of American efforts to tame the beast. In M. Kelly-Louw, J. P. Nehf, & P. Rott (Eds.), The future of consumer credit regulation. Aldershot: Ashgate.Google Scholar
- Which? (2012). Who will front our Watchdog not Lapdog campaign? Which? is calling for a financial watchdog, 18 January 2012 http://www.which.co.uk/news/2012/01/who-will-front-our-watchdog-not-lapdog-campaign-277014/. Accessed 28 Jan 2015.
- Wonga. (2014a). https://www.wonga.com/. Accessed 28 Jan 2015.
- Wonga. (2014b). https://www.wonga.com/trust-rating. Accessed 28 Jan 2015.