The recent changes in payday regulations have most consumers in the lending market more confused than ever. With more than 1.6 million people taking out payday loans each year, how much of an impact will the changes made by the FCA have on the market?
The new regulations set by the FCA introduces three significant changes:
- Cap on the total cost of credit
- Clarification on CPA, or Continuous Payment Authority
- Clarification on affordability assessments
What They Mean
With the implementation of a cost cap, borrowers will no longer have to pay back more than twice the loan amount. The cap limits all interests and fees to a maximum of 100% of the total loan amount, ensuring that borrowers pay only what they are supposed to pay. Before the changes in the FCA regulations were made, lenders charged up to three times the total loan amount. The rule change sets up a fair arrangement where borrowers pay less and lenders see fewer defaults on payment. .
Another change made in the FCA regulations concerns clients whose accounts have CPAs, or Continuous Payment Authority. In the past, lenders could take out multiple payments from their clients’ accounts within a period of one week via a CPA. The recent FCA rule change no longer allows this, setting a limit that lets lenders use the CPA on a client’s account a maximum of two times. It also adds emphasis on the fact that the clients are free to cancel the CPA if they so choose.
Lastly, the FCA rule change puts a stricter implementation of affordability checks. Under the new FCA rule lenders will be required to carry out procedures that ensure affordability based on the client’s income and credit score. This means borrowers will no longer be lent more than what they can reasonably pay back. On the other hand, the rule change also makes it difficult to improve one’s credit score because lenders do not base their decisions on the client’s credit report. Affordability checks are now an important component in the lending approval process, with some lenders already being penalized for failing to comply with the new FCA regulations.
The changes in the FCA regulations have had a significant – but not crippling – impact on the payday loans market. More information about the rule changes can be found on the FCA’s official website, and through Money Advice Service