How Payday Loan Regulation are Fueling the Rise of Loan Sharks in England

The number of borrowers who are approaching loan sharks for emergency money is on the rise in England due to stricter regulations on payday loan lenders. According to the Consumer Finance Association, or CFA, which is an organization that represents the country’s short-term lenders, recent restrictions against the industry have decreased people’s access to these funds by 70 percent. This situation is putting people at risk since some of them are seeking funds from loan sharks.

Stricter Regulations on Short Term Lenders

In an effort to prevent debt problems for consumers, the Financial Conduct Authority, or FCA, initiated a new set of strict regulations against short-term lenders. This is Money reports that the country’s new rules transformed the industry. Several companies left the market while others modified their business practices to comply. These lenders revamped their advertising efforts, decreased interest rates and tightened up their lending criteria.

In the UK, lenders are limited to rolling loans over twice, and they can only attempt to withdraw funds from a borrower’s bank account two times. In June of 2015, Citizens Advice, an agency that works to improve the nation’s policies and practices, confirmed that the number of short-term lending problems have decreased by half. Conversely, the CFA reported that the demand for short-term lending recently increased because of lifestyle changes and economic fluctuations. These situations are causing people to search for funds elsewhere.

Is Illegal Lending on the Rise?

The CFA claims that a third of those who are unable to acquire funds through a payday loan company admitted that they are considering borrowing through an illegal lender. In fact, the UK could wind up in a situation that’s similar to the one that the U.S. is experiencing where six out of every 10 short-term loans come from loan sharks.

According to City A.M., The Illegal Money Lending Team for England issued a report stating that illegal lending is increasing. The agency’s numbers show a 62 percent increase in successful prosecutions involving illegal loans from 2013 to 2014. It is also estimated that about 310,000 households are borrowing funds from loan sharks.

In 2013, the FCA released a statement about the problems that restrictions could cause. An agency spokesperson said, “Many consumers use payday loans because, despite high APRs, that is the only source of credit available to them in emergencies. They might be made worse off by caps on APRs or restrictions on how often they can borrow if availability is reduced.” Clearly, the agency has changed its tune.

Disputing the Claims

Author Carl Packman, who wrote a book about payday loans, condemns the reports. He said, “There is no evidence that illegal loan sharking is on the rise, and it is dishonest to pretend otherwise.” Packman also noted that the industry was under scrutiny for business practices that involve keeping people in debt and failing to check credit histories. Bully-style collection tactics and punitive default charges have also caused government agencies to review the practices of payday loan lenders.

In the UK, officials have responded to the industry’s practices by curbing interest rates and limiting penalty fees to make loans more affordable. In addition, the FCA now requires all lenders to seek an operating license. Those who receive approval are subject to an annual charge.

Struggling Through a Tough Economy

The recession has forced families to modify the way that they handle their finances. Today’s consumers are hesitating to take on long-term debt since the country’s economic recovery remains subdued. Instead, people are turning to interim solutions. Housing prices are rising as are travel costs and utility bills. The Telegraph reports that rail fares have increased by 23 percent in the last 20 years while inflation is quickly surpassing housing prices. A person who earns an average salary will have to save for 22 years to accumulate enough funds for a deposit on a home today.

Russell Hamblin-Boone, CFA’s chief executive, said, “Our analysis of hundreds of thousands of loa forms proves that borrowers are being excluded from credit and concerns are growing for how they are filling the gap in their finances.”

Protecting Consumers

With payday loan regulation increasing business for loan sharks in England, it would seem that the country’s intention of keeping people safe has failed. Instead of winding up in court to face charges for unpaid debts, consumers may find themselves in the hospital for the treatment of broken limbs. The UK should reconsider its recent regulations against the payday loan industry.