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What do lenders need to know about the new short term lending laws?

Mar 17, 2014 Philip Burgess

One of the tenets of running a business is that you shouldn't punish employees when they're working hard, producing good results for the company and are highly successful at what they do. This is common sense when taken in any context - why would you come down on an individual for doing what they're supposed to, especially if they're helping others and prospering in their own right.

So why, then, does the British government seem to have a vendetta against the short term lending industry? The fact of the matter is that the sector is performing extremely well, is known for helping individuals stay afloat when other financial organizations have turned their backs - even if they don't have pristine consumer credit - and is as legitimate as more traditional lending businesses. This witch hunt is even more concerning when one considers the fact that during the global recession, consumers were allowed to utilize the products and services of these companies as they pleased, with no government pushback. Perhaps this was because other lenders tightened their purse strings, so alternative businesses were many people's only option.

Nonetheless, now that the economy is once again stabilized, the tides seem to have changed. Some national leaders and other organizations are doing whatever they can to make sure consumers don't have as many options at their disposal regarding sources of credit.

Representatives of the Financial Conduct Authority (FCA) announced a whole host of new rules on Feb. 28 that it plans to implement in the industry, something that is set to have a lot of effects on short term lenders, the majority of which are sure to be adverse for both companies and customers.

Pushed into a corner and lashing out
Much like an animal when it's backed into a corner, the FCA seems to have crafted these regulations in response to pressure from outside forces. According to Reuters, the group released the new laws as a response to "concerns it is not doing enough to discipline an industry accused of preying on the country's poorest households."

There are a number of problematic elements at play here. For one, especially where implementing nationwide laws is concerned, groups should never take action solely because they feel pressure to do so. Rather, they should consider what's best for consumers. Moreover, it should be stressed that these products aren't only meant for households in a certain economic bracket. At some point, many - if not most - people experience an unexpected expense, like a high medical bill or necessary car repair, so these loans could help anyone.

Borrowers can only roll over twice
Perhaps the most significant of the newest rules is the fact that individuals will only be able to roll over their short term loans twice. This flies in the face of a recent survey that revealed that most people in the United Kingdom pay their loans off on time. Regardless, Reuters reported that not only is this number restricted, but lenders can only use funds from clients' bank accounts or credit cards twice to secure an overdue payment.

That being said, the source explained that some critics aren't happy with the fact that no interest cap was proposed.

The Belfast Telegraph also pointed out that lenders and other authorities will have to make mandatory checks on borrowers' financial situations to ensure that they can afford to pay the sums back at the end of the day.

Lenders do have some time to prepare for these shifts though - the FCA doesn't come into power over the sector until April 1.