Summary of 2014 FCA legislation

There are many aspects of the 1st April, 2014, (effective 1st July, 2014) updated legislation, that are designed to help the consumer, but some ‘help’ has resulted in other potential problems.

The overall intention is to help you – the consumer – understand more about your obligations to clear your debt and to stop you falling into continuous problems with that one loan.

The legislation doesn’t lower the cost of lenders offering loans to individuals, but some caps limit the fees and interest payments.

The help

The regulations aim to ensure that lenders only lend to those borrowers who can afford to repay their debt.

They also hope to make sure that borrowers are more aware of the costs and any risks that are associated with taking out the loan.

There is also the intention that borrowers are made aware of sources of help, should they run into any financial difficulties. There will be many who take out a loan with the full intention of clearing the debt quickly and efficiently, only to find that their employment is taken from them and without any advance warning, making it difficult to repay the debt exactly to the terms of the agreement.

Rollin over your loan

Essentially, the regulation changes include limiting the number of times a payday loan can be rolled over from one payment period to another. When a loan rolls over, more interest on the outstanding debt becomes due. Under current rules, the loan should only roll over twice before the full balance is due.

This gives the consumer the necessary flexibility to roll over some of their loan if they meet exceptional circumstances which means the debt cannot be cleared as they had originally intended.

When the lender can collect from your bank account

Lenders are allowed to try twice, to take the agreed repayment from your bank account and they can only take full payment and not a part payment. Most lenders will use a CPA (Continuous Payment Authority) to take money from your account at an agreed time. If the lender was unable to take money from your account, they would have to contact you first before agreeing another repayment condition.

This is designed to help the consumer know when a lender is expecting to take their money in the form of repayment. This stops a lender taking part of the money at an inconvenient time and means that the consumer will know how much money they have in their bank account through careful budget planning. This also means that the individual cannot suddenly find their bank account empty when they expect to make other payments automatically by standing order or direct debit, sending money to other payments like utility bills, council tax, rent or mortgage repayments.

Where any of those payments cannot be made because of a lack of funds in the account, other charges and fees may become payable by the account holder. Each failure to take money from your account may trigger a fee from your bank (a bounced or refused direct debit); current legislation means that the lender can only trigger this event twice.

This won’t prevent you from making further payments to the lender as you reduce your outstanding debt. It means the individual will need to agree with the lender for a different amount to be taken from your bank account.

Risk warning

Everyone knows that the debt will need repaying at some stage, but not everyone understands that part or total repayment of a debt late, may incur addition interest and fee charges.

The current regulations will tell you, either in paper, or by online information:

Warning; Late payment can cause you serious money problems.

Lenders will tell you where you can go to for FREE (financial) debt assistance, notably, before you choose to refinance or attempt to roll-over a current loan amount.

Information sheets are available at the FCA website. http://fca.org.uk/firms/firm-types/consumer-credit/information-sheets These lists do NOT include any debt advice companies that will charge you a fee for their work.

The problems

http://www.money.co.uk/article/1010308-payday-loans-the-new-rules-for-lenders.htm

Were you to take the example of an individual borrowing £300 under the ‘old ‘ rules, the person would have repaid (approx) £150, £100 and £100 at three monthly intervals, where they could not repay the full debt by the end of the first payday.

Under the ‘current’ rules, a minimum repayment payment has been introduced. In the above example, the minimum is £65 per month, with interest being added as the debt is not being completely repaid. Where the individual decides to reduce their payment to the new minimum amount (from £102 to £65), they will take longer to clear the debt and will pay more interest as the debt will last longer.

This may encourage people to repay their debt over more months, but it might encourage them to repay at a more realistic and affordable level.

The legislation

The FCA (The Financial Conduct Authority) http://www.fca.org.uk/ replaced the OFT (The Office of Fair Trading) https://www.gov.uk/government/organisations/office-of-fair-trading as the regulator of payday loans, also known as HCSTC (High cost, short term credit.)

The FCA Chief Executive, Martin Wheatly, expected that the changes in legislation would remove around 25% of the UK’s payday loans companies. In March, 2014, he told the BBC: "I think our processes will probably force about a quarter of the firms out of the industry and that's a good thing because those are the firms that have poor practices. And for the rest - we want them to improve." http://www.bbc.com/news/business-26539569

The FCA claims that 60% of complaints to the old OFT were concerning the ways in which debts were collected. This should be compared with the fact that the 200 (approx) payday lenders were worth just 1.5% of the £200 billion consumer credit market.

Next legislation changes

Under FCA proposals stated at July, 2014, late payment fees should be capped at £15. The total repaid will not exceed 100% of the original debt; mostly so default charges cannot rise to more than the original debt.

In another proposal, January 2015 should see the beginning of new rules that limit interest and fees on new loans, which includes those already rolled over, that cannot exceed 0.8% of the amount borrowed.

These caps will see the APR on a £100 loan over 30 days equal 1,270% (insert link to APR explanation)

The updated rules will be published in November, 2014 after (hopefully) plenty of consultation from all sides of the subject matter, with a view to having the price cap valid from as early as January, 2015. http://www.theguardian.com/business/2014/jul/15/fca-imposes-cap-on-payday-loans

The Chief Executive of Citizens Advice, Gillian Guy, said “Consumers need more choice and access to advice.” http://www.theguardian.com/business/2014/jul/15/fca-imposes-cap-on-payday-loans Ms Guy may have been calling for this website!

Loan Sharks

Unfortunately, by the very nature of their name, loan sharks operate outside of UK legislation and although their activities should be regulated by the FCA, they will almost certainly avoid the majority of UK legislation. They carry on similar payday loan lending, but at interest rates that have no resemblance to UK legislation.

They will not be interested in caps, fees or charges being governed by legislation and will probably continue to charge whatever they believe they can.

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Writen By:

Jim Cook

Jim cook has been in the financial sector for over 10 years. Specialising in the payday loan sector.

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Data Protection Reg No: Z3508710 - Consumer Credit License Number: 655622