Calls for Innovation
Calls for Innovation ISTOCK

The UK’s high-cost short term (HCST) lending sector has seen huge disruption and many lenders are now seeing effects from the FCA’s 2015 policies.

Whilst introduced in January 2015, these policies have now had enough time to create a visible impact on the short term lending industry. With daily price caps and a tougher authorisation process, the last few years have seen the collapse of some huge UK lenders, including the likes of Wonga (which including backing from Israeli VCs), The Money Shop and QuickQuid.

The collapse of these lending giants shows just how significant the FCA’s policies have been, with many a few years ago thinking the fall of such dominant market leaders incredibly unlikely.

Whilst the FCA’s tightening of margins and lending criteria have significantly contributed to the collapse of such major lending figures, this is also down to influx of compensation claims from borrowers mis-sold loans.

Many short term lenders offered money to customers, quite aggressively, in an attempt to bulk up their loan books – sometime deploying aggressive collection practices to collect funds from people who often could not afford them to begin with.

It is now widely acknowledged that a lot of loans granted over the last 8 years were lacking stringent affordability checks and some offered guaranteed loans without credit checks. With the recent the surge in claims, lenders have seen a £2 billion per year industry fall to under £100 million.

Mis-sold Loans

High-cost short term loans, otherwise known as payday loans, can be quite costly, and when mis-sold, can put borrowers in a difficult situation. When mis-sold a HCST loan, borrowers often struggle to keep up with repayments, which can sink them further and further into debt they cannot afford to climb out of.

Borrowers that are mis-sold a loan will typically struggle to keep up with repayments, and often have had to top-up their loan to keep up with these. Lenders who do not carry out valid affordability checks will typically be at risk of mis-selling loans.

Recently, borrowers who felt they had been mis-sold a high-cost short term loan in the last five years were encouraged to claim for a full refund on the loan amount, and any interest accrued from this.

Alongside encouraging such borrowers to make claims, the FCA pushed for lenders to offer refunds in full, or be hit with big fines. Even when claims were unsuccessful, if put through the Financial Ombudsman Service lenders were charged a £500 administration fee.

The FCA’s crackdown on mis-sold loans has resulted in the UK’s lending giants refunding hundreds of millions back to borrowers, and has further resulted in the collapse of many.

A Gap in the Lending Market

Whist the tightening of regulations has led to the collapse of many UK lenders, there is still a significant demand for short term lending. It is estimated that there are 3 to 5 million Brits in search of short term lending for £500 or less ever year.

With such a gap in the lending market, many within the industry are now calling for innovation to provide borrowers finance that adheres to FCA regulations.

This includes the growth of promising startups such as Wagestream, giving individuals the chance to get any money they have earned from their employer, at any time, without having to wait until payday.

There is also Neyber, who operate through employment schemes and offer low-cost loans, with workshops and guidance on budgeting, investments and savings.