In late November 2013, the Government announced that it will cap the costs of payday loans. The cap will be effected via amendments to the Banking Reform Bill, which is currently being debated in Parliament and which is expected to become law in 2015.
There are currently no details of the level at which the cap will be imposed, and the Government has confirmed that it will be up to the regulator, the Financial Conduct Authority (FCA), to decide this.
This announcement goes a step further than a November 2012 announcement that the FCA would be granted the power to cap payday loan interest rates. Now the FCA will be compelled to act, and Chancellor of the Exchequer George Osborne MP was at pains to stress that the new cap would apply to the total cost of credit, 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,” commented Mr Osborne.
The announcement appeared to have taken the FCA by surprise. Stella Creasy MP, who has vigorously campaigned for a clampdown on payday lenders, said that the FCA had abandoned discussions regarding a cap only a few weeks earlier as it did not think the political will existed to impose one. Following the latest announcement, in a statement on its website, the FCA said: “We need to gather more information before we can cap the cost of credit. This is a complex issue and there are many different aspects to consider to ensure that we get a cap that works well for the UK market. That means researching it, economic analysis and then publicly consulting on its use.”
In a statement, trade body the Consumer Finance Association suggested the cap could have unwanted consequences. “Research from other countries where a cap has been introduced, suggests price controls would lead to a reduction in access to credit, and open up a larger market for illegal lenders,” said a spokesperson.
Payday lending is increasingly becoming a political issue. Without making firm policy commitments, Labour leader Ed Miliband MP has suggested he would like to ban payday loan advertisements from children’s television, to give councils powers to prevent payday loan shops opening and to impose a windfall tax on lenders’ profits.
Other states have already enacted similar legislation. Australia limits interest rates to 4% per month and upfront fees to 20% of the loan. 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.