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New UK Rules Aim to Enhance Competition in Payday Loan Market

 |  March 31, 2024

The UK’s Competition and Markets Authority (CMA) has unveiled new regulations targeting the payday loan industry. The announcement comes following a comprehensive 20-month investigation into the sector, which has often courted controversy over its practices.

Under the new rules outlined in the CMA’s final report, online payday loan companies will be mandated to disclose details of their products on at least one Financial Conduct Authority (FCA) authorized price comparison website (PCW). This move aims to provide consumers with clearer information, enabling them to make informed decisions when seeking short-term loans.

However, the CMA acknowledged a current shortfall, as no commercial PCW holds FCA approval specifically for payday loans. To address this gap, the regulator stipulated that lenders must establish such a platform if none emerges. Nevertheless, the implementation of this ruling will undergo further consultation before being enforced.

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The backdrop to these regulatory shifts is a landscape of significant change within the payday lending sector. Wonga, one of the most prominent names in the industry, recently confirmed plans to slash 325 jobs. The company cited the need to adapt to tighter regulations, indicating a commitment to operate in a manner that is “fairly and responsibly.”

The CMA’s investigation uncovered a lack of price competition among payday lenders, resulting in inflated costs for borrowers. Many consumers were found to be unaware of alternative options due to difficulties in accessing clear and comparable loan information. Additionally, there was a concerning lack of awareness regarding late fees and additional charges.

According to CMA estimates, the UK’s 1.8 million payday borrowers could collectively save an average of £60 annually by switching to more affordable loan options. To further empower consumers, both online and high street payday lenders will be required to furnish existing customers with a summary detailing the total cost of their borrowing.

These regulatory actions reflect broader concerns voiced by politicians and consumer advocacy groups regarding the treatment of payday loan customers, particularly concerning exorbitant interest rates for late payments. In response, the FCA has already taken steps to strengthen regulations governing payday lending, including limits on fees and the frequency of loan rollovers.