Why Payday Loan Companies go into Administration
“There will only be four main payday lenders operating in the sector”. This controversial claim made by the Financial Conduct Authority back in 2014 as it was taking over from the Office of Fair Trading seemed highly unlikely at the time. This is because at that time, payday lending was a booming industry with a market valuation of over 2 billion pounds and with just over 200 lenders and brokers. However, with big industry giants such as Wonga, Quickquid, 247MoneyBox and Uncle Buck going into administration, it now seems like it was an uncanny foreshadowing.
Payday loan companies first came into existence back in 2000 when the country’s economic policies underwent some serious reforms. The operations of payday companies then flourished at an astounding rate over the next decade. There was an exponential rise in the number of companies and customers. So how did these formidable companies go into administration? Below are some of the reasons;
Tougher FCA Regulations
The payday loan industry was crying out for more regulation in 2013. There were constant complaints, making headlines and even attracting the attention of politicians. The Financial Conduct Authority then stepped in and introduced a set of new regulations for the payday loan companies in 2015. The payday loan companies then witnessed their first roadblock.
Acting as the regulator for the market, the Financial Conduct Authority then enforced the rules on the payday loan industries. It moved decisively to check the exorbitant and irrational interests set by some lenders. The FCA made it mandatory for the payday loan companies to fix the number of online loans that a person could buy at time. The companies were also required to check the affordability of the borrowers before disbursing the loans. The companies were also required to display risk warnings on all financial promotions. The initial costs and timescales also made it hard for some lenders to operate with dozens leaving despite being offered ‘interim permission.’
Compensation Claims by Customers
The FCA’s tough regulations against unregulated and wild business practices saw many customers seeking compensation from payday loan companies for giving them loans under bad conditions. The companies were forced to pay the loans. Wonga, being most affected by this has repaid over 200 million pounds worth of compensation eventually rendering it into administration.
High Growth Rate Catching up on Payday lenders
The payday loan industry was booming pre-regulation with many lenders issuing loans aggressively and growing exponentially. This exponential growth, however, came at the expense of issuing loans to clients that could not afford them. The soft affordability checks and funding were based more on behavioural underwriting and aggressive collection practices than the traditional underwriting practices of credit checking and affordability. This resulted in millions of loans being funded to customers without employment, no income and no means of repaying their loan. Subsequently, these debtors now had a strong claim to ask for compensation hence rendering some of these payday lending companies into administration.
Presence of Alternative Products in the Market
Besides the Financial Conduct Authority’s tough regulations, the market has faced competition from similar new products that offer both a longer term to repay the loan and a more sensible interest rate than what most companies charge. These have seen many borrowers take interest in these new tech startups such as BadCreditSite, which are redefining short term loans.
Introduction of Best Practices
Since their inception in 2000, payday loan companies never had to conform to regulations strictly, until the entry of FCA into the market. The clean-up exercise made by FCA finally introduced best practices for the sector to chart out a fresh and sustainable growth trajectory. Some payday companies which were not prepared for the streamlining of the business practices have been on the receiving end of the FCA’s tough attitude.
Since the business model of payday loans was lopsided, always putting borrowers at a disadvantage, the FCA had to step in and burst that bubble with its guidelines. This move has left no room for the payday companies to play foul. Payday lending will always have a role in the UK as an important anti-poverty measure. However, alternative lending platforms with more flexible products such as app-based lending are coming up.