Guide: The Evolution of High-Cost Loans – Are they Fit to Survive?

The payday loan industry’s reputation has been tarnished by years of abuse and misconduct. However, with the intervention of the FCA, it seems like payday lenders have turned over a new leaf. Or have they?

Even so, is there a place for them in the evolving world of modern credit? Find out about the evolution of payday loans in this Quick Loans Express guide.

The basis of this series of articles is the OFT report entitled ‘Payday – Compliance Review Final Report‘ (OFT 1431), released in March 2013. We’ve used the information presented in this report in two different ways. In two chapters, we use the statistics of 2013 and 2017 to compare and contrast what used to happen then with what happens now. Meanwhile, other articles in this series show the evolution of payday loans industry in specific areas. For instance, we have included the issue of responsible lending in a chronological fashion.

As far as possible, we’ve followed the headings of the original 2013 report only making changes for easier reading.

Comparing & Contrasting the 2013 & 2017 Payday Sector

An Overview of the Payday Lending Industry

In Chapter 1, we’ve compared the findings of the Office of Fair Trading in 2013 with a similar report prepared by the FCA in July 2017. The FCA’s report was titled ‘High-Cost Credit & Review of the High-Cost Short-Term Credit Price Cap’, FS 17/2. In this way, we’ve been able to give an overview of the payday lending industry in 2013 and 2017 (Ch.1). We consider:

• The value, size, accessibility and composition of the sector,
• The new business models in the payday loan industry.

Although the FCA price cap was intended to restrict access to short-term loans, did you know there has also been a dramatic drop in loan applications? We attempt to explain what else has altered in the marketplace to explain this change.

How Far is Payday Lending a Properly Functioning Market?

In their original report, the OFT asked this rhetorical question to emphasise the poor business practices they’d observed in their investigations. However, it left us with a problem since the question remained: ‘What is a properly functioning market?’ Therefore, we chose ten characteristics of a market which works well and applied these definitions to the quick loans industry of 2013 and 2017 (Ch.7). By comparing the sector over the space of 4 years and from the viewpoint of how a proper market should function for firms, consumers and regulators, we were able to answer this question once and for all. Read our conclusions about this part of the evolution of payday loans in chapter 7.

The History of Payday Lending from 2013-17

The majority of chapters in this report describe the history of the short-term lending market in chronological order. The OFT report is our starting point. From there, we go through the most important milestones in the evolution of payday loans, whether they were new measures of regulation or shifts in the market itself.

The Application Process – Making an Informed Decision

Chapter 2 looks at the issue of consumers being given the tools to make an informed decision before taking out a payday loan (Ch.2). Therefore, we consider the role of advertising and the provision of pre-contract information. We finish the chapter with the latest regulation (May 2017) of payday lender. For instance, a lender must be on at least one price comparison site so borrowers can shop around for the best deal.

Responsible Lending

We devoted a whole chapter to the question of lending responsibly (Ch.3). Not only do we consider the challenges of applying affordability checks, but give an in-depth analysis of whether they should be standardised. What is the latest news from the FCA regarding prescriptive creditworthiness assessments?

Inevitably, the history of responsible lending also has to include a consideration of the use of rollovers. They were often required when lenders failed to properly assess the borrowers’ ability to repay their loans. We explain what the OFT discovered in 2013 and explain changes in the light of FCA regulations.

The Misuse of CPAs & Identity Fraud

One of the reasons for media scrutiny of the payday loan industry of 5 years ago was the way lenders misused the Continuous Payment Authorities (CPA) (Ch.4). We look at what the OFT discovered and explain whether FCA legislation has done anything to wipe out these abuses. The problem of identity fraud was linked to the misuse of CPAs. Lenders abused the CPAs by not throroughly checking debit card details before agreeing to the use of them. We chart the changes in cases of identity fraud for online same day loans throughout the evolution of payday loans too.

Forbearance & Debt Collection

Another reason for the bad publicity that the payday loan industry received 5 years ago was the poor business practices used by companies when borrowers defaulted on their loans. In Chapter 5 we explain the results of the OFT investigations – you may be shocked by the examples they found of unacceptable debt collection tactics (Ch.5). After this, we go on to consider how much this situation has changed. Are lenders prepared to agree on a reasonable repayment plan for people in genuine financial difficulties or is this an area which needs improvement?

Handling Complaints

In the following chapter, we consider the treatment of borrowers who had a grievance against their payday lender and how their complaint was handled and addressed in 2013 and compare this to the situation in 2017 (Ch.6). As payday loans evolved, lenders hande complaints better.

Payday lenders have been in the news recently because of the dramatic increase in the number of complaints against them. We highlight the three key reasons why the Financial Ombudsman Service (FOS) is receiving more complaints about the short-term loan industry than ever before.

The Aftermath of the OFT Report

The OFT report was released just under a year before their regulatory powers were transferred to the FCA. At the end of the report, they included a chapter entitled ‘Actions: what needs to happen now?’ We felt that we couldn’t leave this question unanswered and so began by comparing what the OFT threatened to do with what actually happened. How far did the OFT carry out their threats to non-compliant lenders in the market? At the time, the OFT was called both ‘timid’ and ‘passive’ – how far were criticisms of the organisation justified?

We felt it was also important to include information about how other organisations and groups reacted to their report and how far it made a difference to changing the payday lending market (Ch.8). We consider the impact of the report on the FCA, the Competition & Markets Authority as well as the reactions of representatives of payday lenders such as the Consumer Finance Association.

Is the Evolution of Payday Loans a Revolution for Modern Credit?

For an overview of the entire industry and a comparison of the market of 2013 and that of 2017, you should turn to Chapters 1 and 7. However, if you’re interested in a specific area of the instant payday loan industry, we refer you to the table of contents given above. We hope that you enjoy yourself as we take you on a journey throughout the evolution of payday loans up until today. But wait! Are there more changes to come?