Achieving Safety and Affordability in the UK Payday Loans Market

Abstract

In the aftermath of the global financial crisis, financial regulation and supervision has been significantly reformed in the UK. As an important part of this reform, consumer credit, including payday loans, has been transferred to the new conduct of business regulator and supervisor, the Financial Conduct Authority. This paper considers the key rules on responsible lending and product regulation, introduced to protect the payday loans consumers. It shows that the responsible lending regime now reduces the risk that payday loans will be given to those who cannot afford the high costs involved, although responsible lending will only be fully effective if credit reference agencies hold up-to-date and correct information. Product regulation, in the form of a rollover restriction and a price cap, should make payday loans cheaper and safer for those who do use them, although, for the price cap to be most effective, steps must be taken to enhance price competition in the space below the cap. Finally, it is shown that firms are now subject to interventionist, rigorous, and consumer-centric supervision, which seems to stand a good chance of securing compliance with the new rules.