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In a move that threatens the very existence of several prominent high street lenders, the Financial Conduct Authority has outlawed certain fees that have previously been charged to payday loan customers. Limits include a cap on daily interest, default charges and overall fees and interest levied on a single account.

According to FCA chief executive Martin Wheatley, the changes will dramatically change the landscape of short-term borrowing. He estimates that only the firms with the best business models will be able to survive the new changes. After all, some 7% of borrowers will no longer meet guidelines that are intended to weed out those applicants that clearly cannot afford to repay the amounts based on their current income and expenses.

There are three primary components of the new more stringent rules:

1. Daily interest charges are capped at 0.8% of the principal. A loan held for thirty days could not include interest charges in excess of 24% of the total amount borrowed.
2. The default fee cannot exceed £15 regardless of the account balance. Interest may still accumulate pursuant to the first rule, but the firm cannot charge additional or higher default fees.
3. The total of the default fee and interest charges cannot exceed 100% of the initial loan amount. If a customer borrowed £300, then they could never be charged more than £600 regardless of the circumstances.

While payday loan operators cry foul, consumer advocates praise the new rules. They point out that many customers would be better off financially without access to such unaffordable products.

Critics claim that the move will just divert borrowing to the underground. Loan sharks could be the big winner as their clientele expands out of desperation. FCA estimate that only 2% of borrowers turned away by payday lenders would do business with a loan shark.

There is common area in which proponents and critics are in agreement. None believe that credit unions will be able to absorb the demand for short-term financial services. These nonprofit financial firms offer emergency loans at rates far below what high street lenders normally charge, but few people actually view these services as a reasonable option.

There is a misconception that credit unions are only for poor people or those who cannot handle their bills and are thus turned away by the big banks. The reality is that credit unions actually offer more affordable options. Some are even exclusive in their membership, making these relationships even more valuable.

FCA’s new rules are set for implementation in January 2015. Firms must alter all existing financial products and advertisements to be in compliance with the limits.

One role of nonprofit organisations like credit unions and charities is to spread the knowledge about the dangers of those high street financial products as well as to provide realistic alternatives to those options. Savvy customers are starting to realise that they do have options, and many choices have much lower costs than what they were previously accustomed to.

Anyone with questions about outstanding loan products may contact FCA at 0300 500 8082. The local money advice service or CAB is also an excellent source of assistance for dealing with unaffordable debt.

The new restrictions are sure to shake up the industry. Only time will tell how the industry will react and whether credit unions will step up and fill part of the void.