For a long time the payday loans sector has generated a lot of attention, and not all of it complimentary. Scrutiny has come thick and fast from politicians and campaigners. Now it is about to face yet another challenge: demonstrating to the public and consumers that it has achieved internal change and reform.
The industry has changed significantly over the past year, but most of that change has been imposed upon it. The new cap on the cost of credit and the introduction of new rules on affordability have had a major impact. The real test for how businesses cope and be financially viable is only just starting to be revealed today.
Lender authorisation: what happens now?
So why is the real test for the industry now and not when the price cap was introduced? This is because many payday loan firms are only now beginning to receive their statements of authorisation from the Financial Conduct Authority (FCA).
To be clear, this doesn’t mean the FCA endorses the lender or puts any particular value on one lender over another authorised lender. FCA authorisation isn’t a kite-mark.
What it does mean is that a lender has met a series of minimum requirements, or Threshold Conditions, to carry out its business activity in a regulated environment. This ensures that the people running the business are considered fit and proper to do so, and can demonstrate knowledge of the rules that govern them from the FCA.
All payday loan firms, after the introduction of new rules from the FCA, were required to reapply for authorisation. For many of them, their interim permissions were due to expire. This is the reason for the spike in loan firms announcing reauthorisation.
But none of this proves one way or the other what the industry will be like now, or in the near future. Have those characteristics that made the industry so notorious a few years ago gone for good?
From controversy to change?
In the period between April 1 2015 and April 1 2016 all payday lenders were running on temporary licences as the FCA studied every business to see whether or not to grant it full authorisation.
During this period, many lenders committed to overhauling their businesses to fit with responsible guidelines set out by the regulator. Upon receiving FCA re-authorisation, which a large majority of those firms within the short term credit sector were able to secure, promises were made to put customers and good governance before anything else.
Certainly things needed to change. The scale of complaints about the industry, particularly with regards to vulnerable customers, became such that it could no longer be ignored. Almost everyone agreed that something needed to be done, and the FCA responded.
During the recent re-authorisation period the FCA narrative about the industry mellowed somewhat. Whereas once the regulator used the payday loan industry as an example for why it needed to “show teeth” and be a tough enforcer, in March last year it noted that the industry was “beginning to take a more customer-focused approach to its business”. So have we finally turned a corner?
That remains to be seen. What we need to do now is pick up on a number of remaining issues: what does the market for affordable alternative credit provision look like? What happens to those people who once turned to a payday lender if they are denied this credit? What appetite do consumers have for short term credit now, following the various controversies of the payday loan market? What is the future for other alternative providers, such as community finance providers or even new FinTech firms?
While we don’t simply want to forget the past, we do recognise that the debate on alternative credit provision has entered a new phase. But lenders from across the board, especially those offering loans to those without an established or prime relationship with a mainstream bank, are going to have to very quickly demonstrate what valuable lessons they have learned and how, if at all, they have changed.
Crucially, they need to show that their decisions about whether to lend and their methods of lending and recovery all benefit rather than harm their customers’ overall financial health. And if they can do that, they will not only be able to justify their existence but also demonstrate that, in certain circumstances, short-term lending can be a useful and constructive option.
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