U.K. regulators have sent a clear message to payday lenders: the party’s over. Now, payday lenders are headed home.
Two U.K. payday lenders have surrendered their licenses, and eight others said they would be leaving the payday loan business in response to letters sent by the country’s Office of Fair Trading (OFT) in March, The Daily Mail reported on July 10.
While this may be seen as a victory for U.K. residents who have called the business practices of these companies unfair, a closer look at the data behind payday loan use in the nation paints a more complex picture. By limiting the supply of payday loans, U.K. regulators may actually be leaving up to 6 percent of the population vulnerable to bankruptcy and the financial disadvantages that can come with this status.
The letters were sent by the OFT to 50 of the United Kingdom’s largest payday lenders. Hamilton Management Services and The Payday Loan Company Limited were the two firms that responded by closing their practices.
Twenty-two firms have yet to answer the letters issued by the OFT.
Why Are U.K. Payday Lenders Closing Down?
In November 2012, the OFT launched a review to determine the extent to which payday lenders were in compliance with the Consumer Credit Act (CCA) and the Irresponsible Lending Guidance (ILG).
U.K. payday lenders were ultimately cited for failing to research whether applicants could afford loans, using aggressive debt collection techniques and not providing sufficient explanations as to how payments would be collected.
What Will This Mean For U.K. Citizens?
The issue of payday lender compliance gained the attention of U.K. lawmakers due in part to the heavy use of this financial instrument by domestic consumers. Research from Aviva cited by The Daily Mail indicates that between 4 percent and 6 percent of U.K. families now rely on payday loans for solvency.
Aviva indicated that fewer than 50 percent of families in the country report the ability to make debt payments. This development may be causing these individuals to seek alternative financial instruments. However, they may soon have fewer options.
If payday lenders continue to close their doors at a similar rate as the initial wave of respondents, seven more large payday lenders may close their operations or realign their businesses around alternative products.
This would mean the total number of large providers in the country would drop from 50 to 33.
Read the full report here.
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