Price cap level confirmed for payday loans
The Financial Conduct Authority (FCA) has announced the final details of the price cap which will apply to payday lenders from January 2 2015.
Essentially, the details remain unchanged from the July 2014 consultation paper. For all loans offered by firms who meet the FCA’s definition of ‘high cost short-term credit’, interest will be capped at 0.8% per day. This means that a customer borrowing £100 for 30 days and who repays on time cannot be asked to pay more than £24 in interest. No matter how many times a loan is rolled over, or how late payment is made, no borrower can ever be asked to repay more in interest and charges than the amount of their loan. The maximum default fee will be £15.
The Government announced plans to introduce the cap in November 2013, but left it to the regulator to decide the level of the cap.
The price cap will be reviewed in the first half of 2017.
The FCA estimates that 70,000 people – 7% of current payday loan borrowers – will be unable to obtain a loan from next year as a result of the cap.
In the FCA press release, chief executive Martin Wheatley said:
“I am confident that the new rules strike the right balance for firms and consumers. If the price cap was any lower, then we risk not having a viable market, any higher and there would not be adequate protection for borrowers.
“For people who struggle to repay, we believe the new rules will put an end to spiralling payday debts. For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections.”
However, Mr Wheatley’s comments to BBC Radio 5 Live’s breakfast show were more strident. Reacting to suggestions that all but a few lenders would cease trading as a result of the cap, he said:
“I don’t think we’d have a problem if there was a lot less than [fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][the current 70 or so active payday lenders] … provided that what was left was actually treating people responsibly.”
Russell Hamblin-Boone, chief executive of the trade association the Consumer Finance Association, commented on the possible negative implications of the cap by saying:
“We’ll inevitably see fewer people getting fewer loans from fewer lenders. The fact is, the demand is not going to go away. What we need to do is make sure we have an alternative, and that we’re catching people, and that they’re not going to illegal lenders.”
But some campaigners thought that the FCA had not gone far enough, pointing out that customers who repay their loans on time will notice very little difference. Stella Creasy MP, a long standing critic of payday lenders, said:
“Today’s news will be welcomed as an early Christmas present for Britain’s legal loan sharks. This cap is just £1 lower than their current charges.
“We’ve warned regulators this cap needs to be much lower to really change the behaviour of these companies, but today’s announcement shows they are still not listening. Other countries are much stronger at taking on these companies.”
The FCA has made regulation of payday lending a high priority since it assumed responsibility for the sector in April 2014. Action of one form or another has already been taken against Wonga, Dollar Financial and The Cheque Centre.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.