Effects of quick loan regulations in Bulgaria and the UK

Due to their nature, payday loans are often the subject of public discontent and a good area for intervention by politicians who aim to protect customers. In this article, we will compare the existing regulatory control over this part of consumer finance in the UK and Bulgaria and examine its effects against the background of the fact that in the latter, enough time has already passed for the consequences of this move to manifest themselves.

The regulations

In England, as well as in Bulgaria, regulations on the granting of quick loans were introduced at the beginning of this year. They do not differ significantly from those adopted in our country, with the main focus being on imposing a ceiling on the APR. [1] As of mid-November in the UK, it cannot exceed 0.8% per day. In real terms, for average quick loans, this amounts to costs of £24 for every monthly loan of £100.

While in Bulgaria the APR cap on loans did not cause much reaction and comment from economists, in England it was widely discussed. The study Capping the cost of payday lending in the UK: What will the impact be?, focusing on the potential impact of the APR cap and other (at that time still under discussion) proposals, concludes that: “… if the [cost] cap makes payday loans much more inaccessible, some people will find an alternative, albeit just as expensive…” [2] There is clearly an assumption here that the APR cap, as well as other measures that later come into force, will reduce – at least to some extent – the supply of payday loans. Kate Andrews from the Adam Smith Institute also reaches a similar conclusion, emphasizing the fact that regulations reduce the profitability of companies in the sector, especially small companies. Economist Steve Davis of the Institute for Economic Affairs focuses on the fact that regulations will hurt the poorest and most needy consumers the most.

In reality, this is exactly what is happening - more than 1/3 of the companies are disappearing from the payday loan market in England, and it is expected that many of those who applied for a license to operate will not receive it.

The effects of price controls in Bulgaria in brief

Let's see whether these predictions of English economists are applicable in Bulgaria and whether they have actually come true in less than a year.

As we have also written, the first danger of imposing a price cap [3] is the exit from the market of some companies providing quick loans, which cannot continue their activities with a lower profit margin and have no way to circumvent the upper limit of the APR. [4] Moreover, we should note that this risk is not just a theoretical situation, but has happened in practice. This is evidenced by the data in the Register of Financial Institutions at the Bulgarian National Bank. As of September 29, 2014, 256 companies were registered there, and as of June 12, 2015, only 164 are present there. [5]

Reality has shown that other companies managed to find a loophole by lowering the APR, but imposing stricter requirements on borrowers, as well as additional fees (outside the APR). In this way, they preserved their revenue margin, while for their customers the situation not only did not improve, as was the original intention for the adoption of the regulations, but even worsened, as they now have to meet stricter requirements and fill out more complex forms.

The third effect of the imposition of an APR cap and, respectively, the exit of some companies from the market is an increase in “black” lending. Although we do not have data on the real situation in Bulgaria, the data from a study by Policis are categorical: in 2004 in the UK, where at that time there was no APR cap, only 3% of individuals had taken out an illegal loan, while in Germany and France, where such regulations exist, this percentage jumped to 8 and 7%, respectively. [6] This practice creates greater risks for consumers, as well as the danger of dubious and unpleasant methods of collecting funds from borrowers in case of default, for example.

Conclusions from theory and practice

The effects of imposing price controls are predictable (and predicted) by professional economists, and our expectations were soon confirmed by practice. Despite the good intentions of politicians, the series of moves (including regulating the font of the contract, minimum capital requirements, APR caps), which were implemented without calculating the consequences for the consumer and business, have proven to be of no benefit to either group.

As expected, the regulations drove some smaller companies out of business, forced others to compensate for the funds lost due to the APR cap with side fees, guarantees and requirements, and respectively did not improve the situation for end users. Some of the latter lost their access to this form of lending (due to company closures and stricter conditions), [7] a second – and most numerous – group of consumers paid almost the same costs (again with stricter lending), and others resorted to off-market financing and exposed themselves to the risks it entails.

[1] The regulations also include imposing a statutory limit on the penalty for late payment of a loan of £15, as well as a cap on all costs and fees on the loan (including the APR), which cannot exceed 100% of the loan amount.

[2] Karen Rowlingson, Lindsey Appleyard and Jodi Gardner, Capping the cost of payday lending in the UK: What will the impact be? Paper for the Financial Conduct Authority, (University of Birmingham, 2014)

[3] The annual percentage rate of charge is the price consumers pay for servicing, granting, and risking each loan. It includes most fees and commissions.

[4] It is also worth noting the requirement, adopted late last summer, that payday loan companies must declare capital of at least BGN 1 million (up from BGN 250,000 previously). This undoubtedly also contributed to the exit of some companies from the business.

[5] It should not be forgotten, however, that the register does not only include companies providing quick loans.

[6] Виж Policis, Thе effect of interest rate control s in other countries, 2004.

[7] And it is precisely those of them who are most in desperate need of credit.

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