Financial services regulator the Financial Conduct Authority (FCA) says it will conduct a consultation before it sets the level of the cap to be imposed on the total cost of borrowing.
At the same time as it revealed the final rules for consumer credit firms, which come into force on April 1, the FCA revealed that it will conduct a consultation in July 2014 on the issue of limiting the cost of credit.
In late November 2013, the Government announced that it will cap the costs of payday loans. Under the terms of the recently passed Banking Reform Act 2013, this cap must be in place by January 2 2015. The Government has confirmed that it will be up to the FCA to set the level of the cap, and the regulator has indicated that its decision on this will be known by November 2014.
The FCA has promised to take into account views expressed on this topic in previous consultations. It says that the main issues raised so far have been whether the move might increase the cost of credit for many people, as prices move towards the level of the cap; and whether the resulting reduction in access to credit for low-income individuals might lead them to seek out illegal sources of lending.
FCA consultations usually allow submissions to be made by authorised firms, trade associations, consumers and consumer groups.
When the proposal was first announced, the Government stressed that the cap would apply to the total costs and not just to the headline interest rate. “We’re going to have a cap on the total cost of credit – we’re looking at the whole package, not just the interest fee, but also the arrangement fees as well as the penalty fees. This is all about having a banking system that works for hardworking people and making sure some of the absolutely outrageous fees and unacceptable practices are dealt with,” said Chancellor of the Exchequer George Osborne MP.
Other states have already enacted similar legislation. Australia limits interest rates to 4% per month and upfront fees to 20% of the loan. However, the Australian experience was cited by trade association the Consumer Finance Association (CFA) as a reason to be wary of imposing a cap. “If the objective of the proposed cap is to drive out rogue lenders the Australian experience has had some success, however it has not reduced household debt or the need for credit. Instead there has been an increase in the number of people who turn to the growing illegal lending market, which the Australian regulator has admitted is a problem,” said CFA chief executive Russell Hamblin-Boone.
Whatever the rights and wrongs of needing to quote Annual Percentage Rates of several thousand pounds on advertisements, it cannot be disputed that payday loans are an expensive form of credit, and action in this area will happen within 12 months.