Legislators in the United Kingdom have asked the Financial Conduct Authority (FCA) to implement changes in the country’s high-cost credit industry. This development comes after the largest provider of payday loans, Wonga, collapsed into administration. The company and many others functioned with predatory, unsustainable business models that rely on trapping consumers in the cycle of debt and relending. The FCA aims to argue that affordable loan prices aren’t just good for customers, they lead to successful credit firms.
Affordability & the Credit Business Model
FCA regulator Jonathan Davidson recently made a speech about the issue, highlighting how the agency aims to make changes. Their goal is to make loans affordable for the average consumer and they plan on doing this by changing the business model of high-interest credit firms. Particularly honing in on the automotive financing and rent-to-own industries, the FCA wants to save consumers in the UK millions of pounds every year. Considering that over 5 million loans were taken out in the first six months of 2018, this is entirely possible.
According to experts at the site MoneyPug, which specializes in helping consumers find the best same day loans, Wonga collapsed because their payday loans were unaffordable. The FCA aims to work closely with companies to show them that offering reasonable loan interest is actually better for the business in the long-run, providing longevity and sustainability.
While Americans are typically wary of the government collaborating with credit companies, the cost of loans has gotten so out of control in the UK that regulators need to intervene. However, it isn’t as easy as enforcing regulations and making new ones, the FCA has said that they need to change the company cultures of these businesses.
Changing Company Culture
Regulators are setting their sights on the company culture of credit firms. Known for their ruthless approach to lending, high-cost credit businesses aim to exploit the most vulnerable people by trapping them into a vicious cycle of debt and relending. To successfully change this, the FCA says, they need to work with the firms to transform the aggressive sales culture.
Preying on people who are susceptible may be a way to get quick profits in the next quarter, but, as we have seen with Wonga, it isn’t a good way to be successful in the future. When a person is forced to renew their loan or take out a different one to pay off their debt, it does not help the individual, the business, or the economy at large.
Relending
Payday loans are designed to get the poorest people to take out multiple loans. When a worker needs money before they get their paycheck, they can take out a payday loan but are often met with excessive fees and nosebleed interest rates. It is the same in the US as it is in the UK. Changing these practices is about changing the whole industry, which is a difficult but achievable task. In the UK, the FCA hopes to not only cap the interest on high-cost credit loans, they want to educate the public.
Educating the Public
While high-cost credit firms should be held accountable for evading regulations and exploiting loopholes, the public needs to be educated on the risks and circumstances of taking out short-term, high-interest, and payday loans. Solving the outrageous rates and debt of consumers is only possible by working with both sides of the issue. An industry known for evasion, there is no telling whether the UK’s lending firms will revert to their old ways. This is why the public has to know the dangers of these loans, and that they should be a last resort.
Learning from the UK’s Regulations
In the next few years, we will see what works and what doesn’t in the UK’s push to make loans more affordable and hold credit firms accountable. Since the industries in both countries are fairly similar, it is key to learn from the UK’s successes and failures. Making credit more affordable may have consumers taking out more loans, but if it leads to less relending and vulnerable consumers finding themselves trapped in debt, the industry, the public, and the economy will all benefit from the changes.
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