UK payday lenders under renewed pressure

Hundreds of payday lenders in the UK are coming under renewed pressure to clean up their act or risk being forced out of business.

As part of regulatory efforts to clamp down on irresponsible lending, providers of high-cost, short-term credit such as Wonga have had to apply for authorisation from the Financial Conduct Authority to continue operating.

Many lenders have overhauled their business models to meet the watchdog's criteria for authorisation, which include the need for providers to treat customers fairly and adhere to new limits on the total cost of credit.

But the short timeframe for implementing the changes and the impact on lenders' profitability is making even some large providers consider closing down rather than apply for authorisation, according to people familiar with the situation.

Lenders hoping to remain in business had to apply to the watchdog before the end of February, but the authorisation process could take months or even up to a year for some of the larger companies.

Further pressure on the industry was applied this week when Labour revealed plans for a levy on payday lenders in its manifesto.

Ed Miliband, Labour leader, said the party would "deal with the scourge of household debt" through a new levy on payday lenders, using the funds to boost low-cost alternatives such as credit unions.

His pledge comes just before Wonga, the largest payday lender in the UK, announces its annual results later this month. The lender has already been forced to undertake drastic changes to its business, by announcing in February that it will halve the size of its UK-focused workforce to save about £25m over the next two years.

John Lunn, a partner at business consultancy Moorhouse, said the FCA was keen to focus attention on payday lenders and that Wonga was "top of the list".

"The FCA has been mandated not to ban payday companies, but to try and make sure they are more transparent in terms of what they're up to," he said.

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The price cap, which came into force at the start of the year, is set to wipe out all but the largest of the UK's 400 payday lenders.

Martin Wheatley, chief executive of the FCA, said last year that the watchdog expected only four or five to continue to operate under the new rules.

John Gathergood, an economist who worked with the FCA on setting the cap, went a step further, suggesting there could be no payday lenders left in the UK under the new policy.

One person familiar with the situation said half of the UK's payday lenders have already pulled out and are not applying for authorisation. Instead they are looking at diversifying, potentially by offering different types of more affordable loans.

Concerns are mounting that cash-strapped borrowers could turn to illegal sources, such as loan sharks, if payday lenders exit the market.

Research by the FCA estimates that the new rules would leave 7 per cent of current payday loan customers - some 70,000 people - without access to these loans.

But other experts are sceptical that consumers will turn to illegal forms of lending and believe there are enough alternatives available.

James Daley at consumer rights group Fairer Finance said: "Before the payday lending industry came about, we didn't have an enormous illegal loan shark industry in the UK.

"Payday lenders grew the market, because they made credit so easy to obtain and so instantly available. If we were to pare it back, we can assume it's not going to open the door to a massive illegal lending sector."

Mr Daley noted that more cost-effective alternatives should arguably be the first port of call for borrowers.

"Credit unions might not be for everyone, but if you live in right area or work in right industry, they are significantly cheaper," he said.

Credit repair cards, which allow borrowers to improve their credit history, are also available, while a number of authorised bank overdrafts offer "reasonable rates", he added.

The Co-operative Bank, for example, this week launched a new overdraft created with its customers to reduce the cost of borrowing. The new structure abolishes fees for arranging an overdraft and includes a £20 buffer allowing customers to go over the limit without incurring a fee.

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