03 Dec 2014

Analysis: FCA announce cap on payday loan charges

Analysis: FCA announce cap on payday loan charges

 

Leonie Donald, Partner, discusses the recent announcement by the Financial Conduct Authority to cap payday lending rates.

The New Proposals

Back in July 2014, the Financial Conduct Authority (‘FCA’) revealed their proposals to protect borrowers from the exorbitant rates associated with the payday loan industry. They planned to achieve this by capping borrowers’ interest and fee rates at 0.8% per day, their default fees at £15, and ensuring borrowers never have to pay back more in fees and interest than the amount borrowed by proposing a total cost cap of 100%.

This week, the proposals of the FCA have come to fruition with the announcement that the above noted proposals will now be mandatory for payday lenders to adhere to from January 2015.

By way of example, from January 2015 if someone were to borrow £100 for 30 days and pay back on time, they would not pay more than £24 in fees and charges.

The FCA have been pursuing a crackdown on payday lenders for some time in order to alleviate the financial burden on borrowers finding themselves in more debt than ever. The FCA has previously implemented other rules for payday firms such as affordability tests and limits on rollovers and continuous payment authorities.

Outcome

As a result of the new rules for payday lender firms, the FCA predicts that these firms stand to lose around £420 million in revenue per year, whereas consumers will save on average £193 per year. Some are now predicting that all but the big three payday lenders, Wonga, Dollar and QuickQuid, could be put out of business.

A statistic published by the FCA highlights how 70,000 people who were previously able to secure a payday loan now would not be able to do so under the new, stricter rules. This figure represents about 7% of current borrowers.

The payday lender rules coming into force show an impressive willingness by the FCA to get their proposals off the ground and implemented efficiently. Indeed, the news this week is just one of many changes the FCA have made since replacing the Financial Services Authority in April 2013, and acts as further evidence of the regulator’s determination to follow through on promises made where change is necessary.

Conclusions

Citizens Advice Scotland (‘CAS’) has welcomed the FCAs announcement. However, they warn that more needs to be done to protect consumers in relation to excessive payday loan charges. They view the changes from January 2015 as a step in the right direction, but stress that payday lending has not suddenly become a ‘safe’ borrowing option. CAS have now called for an increase in the number of fair borrowing options, so those who need to borrow money do not have to resort to high-cost payday loans.

There is to be a review of the changes announced this week in 2017, although there have been calls for a review of the new system at the end of 2015. This is to ensure the changes in force from January 2015 are achieving their purpose, and to monitor the effects of the new rules closely to prevent illegal lenders filling a potential credit gap.

Leonie Donald, Partner

@AC_Leonie



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