The UK’s high-cost short term lending industry (HCST) has seen a huge upheaval in the last 12 months – possibly more so than any other regulated industry in the UK.
Whilst the Financial Conduct Authority introduced new policies in January 2015 such as daily price cap and a tougher authorisation process, it has taken some years to see the full effect.
Notably, the introduction of strict rules has seen some of the UK’s largest lenders fall into administration in the last year including Wonga, Quickquid and The Money Shop – and given the market dominance of this companies, it is something that would have seemed impossible and unlikely some years ago.
Tighter margins and stricter lending criterion have contributed massively, but above all the surge in compensation claims has seen the once £2 billion a year industry fall to less than £100 million per year.
The rise in compensation claims
Any individuals that had previously received high-cost loans or ‘payday loans’ in the last 5 years were encouraged to claim full refunds on the loan amount and interest – provided that they felt they have been miss-sold.
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This particularly reflected those that struggled to repay, had to keep getting top-up loans, were unemployed or on benefits and may have been funded without any real affordability checks.
The regulator encouraged short term lenders to offer full refunds or face a large fine by the regulator. The result has seen Wonga refund over £400 million and Quickquid in the region of £50 million so far.
Furthermore, individuals were invited to put claims forward through the Financial Ombudsman Service who charged lenders a £500 administration fee, regardless of whether the claim went through or not.
For lenders to take on costs of such magnitude has seen a significant impact on the bottom line of lenders and many others have followed in administration including PiggyBank, Moneybox 24/7 and WageDay Advance.
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Demand for loans is strong – we need innovation
However, with fewer lenders remaining in the market, there is now a huge gap of individuals looking for short term loans who cannot access them.
In fact, the number is estimated to be between 3 to 5 million Britons who are looking for short term loans of up to £500 but cannot get them due to the lack of supply or very tight lending criteria from those lenders that can offer them.
This highlights the need for innovation in the short term lending industry in the UK that can fulfil both the demand of the customers and those of the Financial Conduct Authority.
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The future of short term lending
David Soffer, Director of Payday Bad Credit commented: “The last year has been very challenging for short term lenders, but it seems that the industry is taking a shift from lending out £300 or £500 loans for 1 to 3 months towards much bigger loans that last longer such as £1,000 over 12 months.’
‘We need to get people out of this spiral of debt and instead try give one larger loan that will last for longer, rather lots of little expensive loans. Other ways that lenders are reducing risk is by offer loans with a guarantor or secured against a valuable asset, since this provides more security for both the customer and the lender.”
Ian Sims, Director of Badger Loans commented: “We are very much due for new innovation in the short term lending industry. Already we are seeing low cost alternatives like Wagestream and Neyber who are raising a lot of money through VC’s and trying to partner up with different companies and organisations.’
‘But we need to get borrowers to think differently too. Payday loans are not the answer for everyone borrowing money short-term and people need to start thinking about more cost-effective ways of borrowing whether it is long-term, low-cost credit cards or through employee work schemes.”