The OFT’s regulation of payday lenders was described by the Public Accounts Committee as “timid”; the new regulator’s approach is anything but. Outgoing FCA Chief Executive, Martin Wheatley, infamously described this new regulatory culture as “shoot first, ask questions later”, but it is not without criticism. The FCA is still striving to find the right balance between robustly protecting consumers, and yet preserving healthy market competition.
There is no dispute that the consumer credit market needed stricter regulation. In June 2014, well-known payday lender, Wonga, was forced to pay £2.6m in compensation to tens of thousands of its customers for sending threatening letters from non-existent law firms as part of its debt collection policy. Perhaps it is telling that the incident only surfaced after the FCA took up the reins of consumer credit regulation in 1 April 2014.
The transfer of consumer credit regulation to the FCA has been wholesale. All firms previously regulated by the OFT under the Consumer Credit Act 1974 have been required to reapply for authorisation to carry out such activities, now regulated by the FCA under the Financial Services and Markets Act 2000. In addition, some sectors not previously regulated, such as debt management firms, have been required to apply for authorisation for the first time.
Albeit Parliament voted against legislating for a cap on payday loans, the FCA was tasked to introduce appropriate limits. From 2 January 2015, high-cost short term credit has been limited to 0.8% interest per day (292% APR), maximum default fees set at £15, and total fees capped at 100% of the original loan amount, meaning consumers will never pay back more than twice the amount they borrowed.
The effect of these changes, at least in the payday loans sector, has been significant. The number of lenders has shrunk by a third, with 153 OFT-regulated firms deciding not to reapply for authorisation. Moreover, Citizens Advice dealt with 45% fewer payday loan problems during the first three months of 2015, as compared to the same period the previous year.
However, the future landscape of the consumer credit sector remains unclear, as applications for authorisation are still being considered. The statutory threshold conditions against which firms are assessed are wide in scope: for instance, firms must be “fit and proper” in order to carry out the regulated activity. The FCA Handbook gives further detail, but the FCA’s benchmark for such high-risk activities is not yet fully known.
If the payday loan sector substantially disappears, without banks and other institutions offering alternatives, vulnerable customers may be forced towards unregulated loan sharks or face their property being repossessed. Similarly, a fall in debt management options may lead to a greater number of bankruptcies, or the charity sector becoming swamped with debt-related enquiries.
The good intentions of Parliament cannot be doubted but, in the light of such robust FCA regulation, the sector waits with baited breath to find out what role remains for consumer credit firms in the modern economy.
Mark Smith is a barrister with a broad practice across crime, family and civil work. Mark gained experience of regulatory matters on secondment as a legal adviser to the Credit Authorisations Division at the Financial Conduct Authority (FCA), assisting with the implementation of a new regulatory regime under the Financial Services and Markets Act 2000.