New Payday Lending Rules

New rules for payday lenders and brokers come into force

January 2 2015 saw new rules come into place for both lenders and brokers in the payday loan sector.

Lenders are now subject to the ‘price cap’, whereby they can charge only 0.8% interest per day. This means that the repayment amount on a £100 loan taken out for 30 days, and repaid on time, cannot exceed £24.

Default fees are now capped at £15, while no borrower can ever be asked to pay more in interest and charges than the amount of their loan, regardless of how late the repayment is made.

The price cap will be reviewed in 2017.

The UK’s largest payday lender, Wonga, has announced that it has reduced its daily interest charge from 1% to 0.8% in order to comply with the cap. This means that its Annual Percentage Rate has fallen from 5,853% to 1,509%, and that the repayment on a 30 day £100 loan is now £24 instead of £37.15. The lender has also reduced its default fee from £20 to £15.

It remains to be seen how many lenders can continue to operate a viable business now these restrictions are in force.

The new brokers’ rules actually affect all credit brokers, regardless of the type of loan they arrange. However, it was serious concerns over the practices of payday loan brokers that prompted the regulator, the Financial Conduct Authority (FCA), to act in this area.

The new requirements for credit brokers include:

  • To state their legal name in all advertising and other communications with customers. If they choose to state any trading names, this must be in addition to their legal name.
  • To state prominently in all communications that they are a broker and not a lender.
  • To make clear the amount of the fee to be charged (or an estimate if an exact figure is not possible), together with details of when and how the fee will be collected.
  • To give customers a 14 day cancellation period when applying for a ‘distance’ contract (one arranged without face-to-face interaction between broker and customer).
  • To report to the FCA on a quarterly basis regarding their web domain names.

If firms do not carry out each of the first three steps listed above, they will be forbidden from collecting fees or asking for payment details from customers. The information must be provided to the customer in a durable medium, such as on paper or via email, and the firm must wait for the customer to confirm receipt of this information before any fees are taken.

The new broking rules will be the subject of a consultation later in 2015, at which time firms can state their views. However, the FCA has taken the unusual step of introducing the rules before the consultation, as it believes there is a compelling need to protect the public from unscrupulous brokers. So all credit brokers should be complying with the rules listed above from today.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.