UK: Online Micro Loans

Last Updated: 16 August 2011
Article by Richard Marke

Originally published 29th June 2011

Recently there has been a proliferation of online providers of so-called 'micro loans'. These are relatively low value loans (sometimes referred to as 'payday loans') typically £50-£300 which are repayable within a very short time, usually no more than thirty days later. One of the most prominent recent examples is the service provided by 'Wonga'.

This article looks at some of the reasons why this proliferation has taken place and speculates on the future regulation of this kind of business.

Office of Fair Trading Review into Micro Loans

In April last year, the Office of Fair Trading (OFT) (the regulator for loans regulated by the Consumer Credit Act 1974 (CCA)) published a report into the market for micro loans. Its conclusions were broadly positive. The OFT found that in a number of respects, these markets were working reasonably well, for example, suppliers have met the demand for easier access to their products and complaints to the OFT are low. However, the OFT did have concerns on whether there was enough competition within the market. The OFT made several recommendations such as that the Government helps consumers make informed decisions and that the relevant trade associations promote best practice.

This has given something of a boost to companies interested in participating in this market since it is clear that the OFT does not have this high up their agenda and is not likely to take steps to limit the amount of interest that can be charged. That is not to say that the OFT is ignoring such companies: there were two cases at the end of last year1 where the OFT imposed requirements on the micro loan companies involved, in particular to prevent the misuse of contractual rights of the lender to make multiple attempts to withdraw overdue sums directly from a customer's bank account.

Consumer Credit Directive

In February of this year, the Government implemented the Consumer Credit Directive 2008/48/EC. This brought about a very significant change in consumer credit regulation generally. The main changes were:

  • advertising and APRs – changing the rules about the information to be provided about interest rates and a new concept of a "representative APR" (which must reflect at least 51% of the business expected to result from the advertisement);
  • creditworthiness and adequate explanations – introducing a requirement to assess the borrower's creditworthiness (ie how affordable the loan is) before granting credit and ensuring that the borrower is provided with an adequate explanation of the proposed credit agreement;
  • pre-contractual information and agreements – the borrower is to be given specific pre-contractual information in good time before entering into the agreement; and changes were made to the required form and content of loan agreements; and
  • right of withdrawal – a right for the borrower to withdraw from a credit agreement within fourteen days following the completion of the agreement, subject to the borrower repaying the credit and paying interest for each day the credit was drawn down.

In practice, none of these changes greatly impacts on the ability of an online micro loan provider to carry on its business:

  • Advertising for many micro-lenders will be done mainly online, which allows changes to be made rapidly as necessary to reflect the requirements of the "representative APR".
  • The CCA does not spell out how creditors should go about assessing creditworthiness, other than to require that this must be based on sufficient information obtained from the borrower – it is for creditors to judge when information should be sought. Arguably, in the case of small loans this could be relatively little information and in any event typically micro lenders will carry out a credit reference check before proceeding.
  • By the same token, the extent of "adequate explanations" will depend on the circumstances and context. It seems likely that the simplicity of many micro loans and the information that micro lenders give on their website and in the loan and pre-contractual documentation will be sufficient to fulfil the requirement.
  • In terms of the loan documentation and pre-contractual information, the CCA has for many years permitted loan agreements to be executed electronically and there is no need to supply the potential borrower with a hard copy of the loan to sign. The changes brought in by the directive to the pre-contractual information do not impose a great burden, given that the information will be largely the same for all its customers (making changes only for the commercial terms applicable to payment, amount borrowed, interest and APR etc). If anything, the changes made to the Agreements regulations make it easier for lenders to present a relatively user-friendly form of agreement without the many restrictions and limitations that were presented under the previous Agreements regulations.2
  • The new right of withdrawal is also unlikely to trouble online micro lenders since the customer is required anyway to pay back the interest for each day the credit was drawn and the applicable rate of interest will have been calculated on a daily basis in any event. It seems unlikely that in practice many borrowers who are seeking the convenience of ready cash into their account will opt to use this right.

More entrants into the market?

This seems highly likely. The barriers to entry are surprisingly low.

This kind of lending is not regulated under the Financial Services and Markets Act 2000 and so a prospective lender does not require a Financial Services Authority (FSA) authorisation, with all the exacting requirements and detailed scrutiny that that involves.

The lender simply requires a licence under the CCA. This is surprisingly easy to obtain by means of an online application form. Applicants apply for the applicable category of licence, which for this kind of lending would be Category A (Consumer Credit Business). The licence is normally issued within 25 working days unless the OFT regards the application as being high risk, in which case the non-binding target for responding is 90 working days. The licence fees are currently £1125 (including the CCJ levy of £150). There are no capital adequacy requirements and the main concern of the OFT seems to relate more to confirming that the "controller" and individuals involved in the business do not have previous "form" for regulatory infringements, director disqualifications, insolvencies etc.

At the same time, there is a ready availability of outsourced providers of all of the related services that an online lender would require. This is not only with respect to debt collection, but also in terms of back office processing. The third party that provides these services may also require a CCA licence, but other than taking reasonable steps to ensure they behave in a way that does not jeopardise the validity of the loan agreements, the lender is unlikely to be troubled by any regulatory issues in outsourcing in this way.

In practice, new entrants will be competing with existing providers on who can set up the most user-friendly websites and related documentation, terms and conditions etc as well as on the basis of competitive rates (as compared to the alternatives, such as bank overdrafts).

It is also likely that the size of the loans will increase. It was reported today that a new entrant to the market "Borro" has made a £1 million online loan, albeit secured on a fine art collection owned by the antiques collector borrower.

More changes on the way?

There is a 'Private Members Bill' (the Bill) which proposes to limit the amount of interest that may be charged on micro loans, together with a proposal for a levy to be paid by lenders to fund assistance to vulnerable borrowers. However, the Bill is at the very earliest stage (having completed the first reading) and has been brought by means of a "10 minute rule bill". Typically such bills do not become law as they are not backed by the government and time is generally not made available in parliament for them to complete their passage into law. Frequently they are just brought before parliament to raise publicity for a particular cause or member of parliament.

That said, there is much discussion about whether consumer loans would be better regulated by the FSA (or, in its new guise, the Financial Conduct Authority – FCA) and whether it is justifiable to continue to have an entirely separate statutory regime applying to consumer loans when the FSA already regulates, for example, first charge mortgages.

It is probably fair to say that this kind of lending will be under further review by the Government and the regulators as time goes on. However, for the time being, the wind is set fair for new entrants to enter this market and enjoy the relatively benign regime whilst it lasts.


1. SafeLoans Limited 271778 and CIM Technologies Limited 615666

2 The Consumer Credit (Agreements) Regulations 2010 replace, for these purposes, The Consumer Credit (Agreements) Regulations 1983.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.