FCA enforcing tougher UK payday loan rules

Payday loan regulations just got a little tighter. The Financial Conduct Authority (FCA) has found itself trying to reign in predatory practices of certain payday lenders that have been exploiting some of the most vulnerable citizens.

Those citizens that can least afford to repay the crushing interest rates charged on payday loans are actively sought by many of these high-interest companies. They are often taking advantage of individuals. Most financial company executives know that people with damaged credit often are unable to manage their money properlyt, and they cannot seem to break the cycle of borrowing money that they cannot afford.

To exploit this habit of consumers overextending their personal budgets, payday companies often will allow a borrower to roll over the balance they own into a new loan. Such rollovers can keep a person indebted for months or even years at a time. In almost all cases, they end up paying far more than they could ever afford to pay for the right to borrow such a small amount of money.

To combat such negative temptation, the FCA has begun enforcing new UK payday loan rules that took effect 1 July 2014. The new laws will protect consumers. Companies that offer high-interest loans must now comply with the new regulations that govern such products.

New Rules Implemented

All payday loan products must now show a prominent risk warning that advises potential borrowers of the dangers of high-priced borrowing. It will note the interest rates and costs involved to consumers. Any advertisement or promotional material must show this warning before the customer is allowed to complete their application.

A rollover of a payday loan is still permitted according to rules put into place by the Financial Conduct Authority. Borrowers must now be provided with an information sheet for all high-cost short-term borrowing anytime they request a new loan or rollover of an existing debt. The information sheet will also need to include consumer information that guides them to seek advice through a national charity.

Rollovers are now limited to a maximum of two extensions. Once a payday loan has been rolled over twice, the borrower may no longer roll over the balance. The purpose is to break the cycle. It can ideally prevent the overuse of payday loans, since their use has been linked to chronic poverty and indebtedness.

Recurring payments also have additional restrictions. Known as continuous payment authorities, firms that process payments on a recurring basis from a credit or debit card may no longer attempt such transactions following two consecutive unsuccessful attempts. They cannot take partial payments on the account either. In such situations, only the debtor may consent to reestablishing such an agreement if they would like to resume making instalments on the loan.

The regulators at the FCA are responsible for making sure that financial firms play fair. This authority does not ensure that some firms will not break the rules. When they do, the FCA will investigate and penalise such firms.