Payday Loan Caps May be Helping Loan Sharks

In 2014, the Financial Conduct Authority (FCA) went all in when it came to reining in the payday loan industry and imposing new rules, regulations and practices. This initiative was meant to ensure consumer protections were in place and to shield the most vulnerable and low-income households from being taken advantage of. It was a success as a majority of loan applications were rejected last year.

At the time, however, the payday loan industry warned that any new stringent measures would prompt impoverished and desperate consumers turn to the unregulated side of the industry: loan sharks.

Most people who were in favor of installing new rules and regulations scoffed at the notion, and dismissed it as fear mongering in order for the Alaska payday loans industry in the United States to operate in a sort of wild west.

But new reports suggest that the payday loan representatives may have been right after all.

The British financial watchdog has initiated a review in order to determine if capped interest rates on payday loans are driving consumers into borrowing funds from unregulated and illegal loan sharks.

Officials concur that the cap has provided major improvements for consumers because they will not be required to pay back more than double the amount borrowed. This also means that Britons will not be involved in a debt trap, and the numbers show that fewer are falling into arrears because of these caps in place.

What about the consumers who were unable to get short-term loans? Where did they go to for money?

“We have to be careful that we do not create a market which encourages illegal lending,” FCA Chief Executive Andrew Bailey said in a blog for MoneySavingExpert.com, a consumer campaign body. “Going to illegal money lenders, or loan sharks, means that you are not protected if you find yourself unable to pay.”

Moreover, it isn’t just payday loans that have fallen under the consumer watchdog’s microscope. The agency is also looking at catalog credit, rent-to-own lending, guarantor loans and pawn brokers. In addition, financial institutions are being scrutinized as part of the FCA’s latest investigation as well.

“The FCA will look in more detail at overdrafts from a consumer protection as well as a competition perspective, using its full range of powers,” the FCA said.

In the meantime, payday loan businesses will generate the greatest amount of scrutiny. With nearly one million fewer consumers being approved for payday loans and 40 percent of lenders leaving the market altogether, the researchers will attempt to find out just where exactly they have turned to for their pecuniary needs.

Ultimately, if they have utilized loan sharks then this would be the unintended consequence that so many people, both analysts and trade representatives, warned about prior to the regulations.

A similar argument is happening in North America so the results of the FCA’s investigations may provide some officials a great deal of evidence to give pause and reexamine their numerous proposals to stop payday lenders from operating in cities or restricting their expansion plans.

The organization’s findings will be published in the middle of next year.