Cheque Centre Ltd is one of many payday loans companies affected by the new FCA regulations. How can these businesses who continue to operate under the strict FCA regulations survive in the future? Payday Loans Net explores this case to learn more.
This article is about FCA regulation for payday loans direct lenders which firced some companies out of business. We shall examine:
- The administrators have been called in at Cheque Centre
- The American parent payday loan company
- The many companies affected by the FCA regulating of the industry
- What the regulations are about
- The difficulties in getting a payday loan
- Smaller profits for payday loan companies
- Whether payday loan businesses can survive
Famous Edinburgh based short term loans company, Cheque Centre, have recently announced that they have gone into administration. They had withdrawn from payday lending. This was due to seeing profits fall after the introduction of FCA regulations in 2014. The company, who once traded from 300 stores in high streets around the country, closed 75% of their shops after the onset of the new regulations. For the years 2014 – 2015, the company reported a turnover drop from £274 million in 2014 to £163 million in 2015.
Effects on business following FCA regulation
CNG Holdings Inc is the US-based parent company of Cheque Centre. They sell payday loans in the United States. Cheque Centre booked losses for the 2014 year of £23.2 million and £8.8 million pre-tax loss in 2015. The FCA granted the company permission in April 2016 to trade their pawnbroking services and an online short-term loan product.
By October 2016 the company has announced proposals to discontinue trading from stores. They focus on a few booths in the shops of a related company. Cheque Centre will concentrate on online sales of short term loans. The parent company will continue to support Cheque Centre Ltd until the end of 2017. Joint administrators are currently assessing the financial position of the business. Until Cheque Centre Ltd determine their options, they have retained their staff of eleven.
The payday loans market is a much fairer place today, thanks to laws that pushed out the rogue companies who were not willing to stay in business and operate according to the new rules. Once the FCA outlined plans for the new regulations, more than 38% of lenders decided that they could not run with such low-profit margins. They did not bother to apply for a licence to operate from the FCA. The FCA’s job of regulating the industry became easier as they were only dealing with companies who were serious lenders and were willing to comply with their new rules.
What change did the FCA implicate?
The new regulation for short term high-interest loan companies put a price cap on the interest lenders can charge per day to 0.08%. A small loan of £100 over a period of 30 days incurred interest expense of around £24 over the term of the loan. Although this still means that the APR of payday UK loans can be well over 1000%, it is much lower than some companies who used to charge whatever they liked.
Fees for missed repayments were also capped at £15, resulting in a stop of roll-over fees that previously meant that the borrower ended up paying many times the original sum of the loan. Under the new regulation, a customer will never pay over twice the amount of the borrowed sum. Before the laws, payday loan customers swamped the authorities with complaints about the unfair treatment of payday loan clients and millions of people got into serious debt.
So what have we learned so far?
- High Street Lender Cheque Centre has called in administrators
- They will withdraw from the high street and concentrate on their on-line sort term loans business
- The last few years have seen losses of millions of pounds for Cheque Centre Ltd
- Before the FCA regulation of the industry, 38% of lenders withdrew from the payday loans market
- Price caps were enforced to prevent vulnerable people from getting into unmanageable debt
- Short term lending now costs a lot less than before the regulations
- It is much harder now to get a payday loan
New FCA regulations
The FCA regulations also imposed much stricter lending criteria on payday loan companies with affordability checks made mandatory. A much fewer number of people now qualify for payday loans than before the regulation, and they have been forced by this action to seek other unregulated means of high-interest credit for short term loans. Less business for loan companies has ensured that even more companies had to go out of business. The FCA introduced new competition rules for the payday loans industry in May 2017. Forcing websites to display links to comparison websites enables customers to compare loans and get the best deals aims to make the market fairer.
Because of the high-interest loans that payday loans companies supply, many people mistakenly believe that they still make mammoth profits. The risks involved in providing short term loans to people with bad credit histories are considerably higher for this kind of company. Administrative expenses are included in the price of the short-term loan, making the price higher. Businesses also must consider their running costs before they can take their small profit.
Smaller companies have found that operating under the new regulations needs a solid business plan with fewer overheads. Cheque Centre abandoned shops on the high street because of this. Instead, they focus their resources on online lending, that has much smaller company expenses. Payday loan companies have diversified and now offer online loans to repay over longer periods of time and other kinds of financial services. They cater to the people who cannot get credit from the high street banks unless it is an overdraft, many times more expensive than a payday loan.
What Can we Learn from the Effect of Regulation on Cheque Centre
The industry has been cleared up, and only lenders who wanted to play by the rules bothered applying for a licence to operate through the FCA. Many other banks tried to stay in operation. However, they found that they could not cope with the financial stress of compensation pay-outs to customers the had lent to irresponsibly. As short-term loans companies now have fewer profits they have had to reorganise their businesses to cut overheads if they want to continue in business.
Cheque Centre is one of these firms who will continue to operate an online-only loans service. Many companies now offer loans for longer terms of up to six months that are easier for customers to repay, to stay in business. Meanwhile, others have diversified into other types of lending and financial services. These are the only financial institutions who cater to the millions of Britons who cannot get financial services from high street banks. There are other forms of loans such as those from credit unions, with much better rates, but they cannot compete with the speed and convenience that payday loans offer.