We can hope that memory of the payday backlash will remain a vivid one for British customers
Tim Wheeldon is joint managing director at Fluent Money
January payday: one of the most anxiously awaited days of the year. Many employers pay their staff early in December and so across the UK people count the days to the end of a long pay-free period.
The wait for this year’s payday has been even longer, as 2nd January marked the official end of payday lenders’ stratospheric interest rates. After months of negative press and the start of a new regulated world for payday lenders, we hope that this first month has seen a drop in customers heading for the high street to keep on top of their finances.
Yet although new FCA regulations are officially in place to avoid the stings endured by payday borrowers in the past, there remain a number of concerns for the approximate 1.8 million customers getting financial help from them each month.
The milestone reform was cause for celebration for everyone except the lenders themselves. However, it has also sparked some concerns from the campaigners for said reform, as they still fear that loopholes could allow ‘legal loansharks’ to come back fighting.
The financial regulator’s intervention has successfully brought about a substantial change to the payday loan process, ensuring that no borrower can expect to be charged twice the amount borrowed as interest. It also guarantees that charges for late payments cannot exceed £15. These changes are set to transform this multibillion-pound industry, but by no means eradicate it.
This of course makes sense, as a multibillion-pound industry carries its own benefits for the overall economy, and acts as a means of employment. The FCA has stated that it does not want to dissemble the entire sector, but rather wants to legitimise it and crack down on some of its less scrupulous practices.
However, opinions are seriously divided when it comes to discussing the long-term future of what was previously labelled the ‘Wonga economy’. Depending on who you ask, all of the former payday lenders could see their shutters slam down by the end of the year, or they could continue to thrive thanks to the conditions in place to prevent their total demise.
My guess would be that this is far from the last we hear from Wonga, QuickQuid, MyJar et al., The new rules in place are truly game-changing, and were much needed. The greater issue for many comes from the fact that most companies will take advantage of charging the highest interest threshold allowed, meaning they can still profit from short-term, high-cost lending (at the moment of writing, only one major company has not taken this route).
My thoughts would also be that, if payday lenders do reach their own paydays this time next year, it will have less to do with legal loopholes and interest thresholds than with the prevailing ignorance in this country when it comes to personal finance.
Critics of the new legislation have drawn comparisons to other countries that have come down with greater force on similar companies, but it is worth remembering that last year, in addition to passing the payday lending reforms, the FCA doubled its interventions into suspect businesses. The regulator is more involved with our finances than ever before, but can’t be expected to dismiss all debts overnight.
Now that the FCA has placed limitations on payday lenders, we need to tackle the issue of why so many individuals are drawn to short-term high-cost credit in the first place.
How do we do this? For one thing, the excessive advertising of extravagant and often unsustainable lifestyles is not new, but should be treated as an ethical issue. Educating young people and providing guidance to families about household incomes should be prioritised. Those that find themselves struggling to make ends meet should be made aware of the wider options open to them and be treated with respect as they work to keep afloat.
These are some of life’s unending issues, and it might be true that payday lending will always be a symptom rather than the cause. But we can hope that memory of the payday backlash will remain a vivid one for British customers, and that they learn lessons from the past misdeeds of Wonga & co and think carefully before heading to back to them for loans again.
