News Column

FCA imposes cap on payday loans

July 16, 2014

Jennifer Rankin,

People taking out payday loans will never have to repay more than twice the sum they borrowed, under a further clampdown on the controversial short-term loans industry proposed by the UK's financial watchdog.

The cap proposed by the Financial Conduct Authority means that if someone borrows 100 from a payday lender and pays it back within the agreed 30 days, they would pay a maximum of 24 in charges. Fees for late payment would be capped at 15, with a total price cap of 100% of the original loan to stop default charges spiralling out of control.

The FCA said it had tested other price caps, but double the original loan was easy for consumers to understand.

The regulator's stricter-than expected cap comes one day after newly appointed Wonga chairman Andy Haste announced he was axing the payday lender's cuddly grandparent puppets, used on adverts around children's programmes, as part of a bid to clean up its act. Haste said he expected the FCA cap would mean Wonga would a "smaller and less profitable business" in the short-term.

The Church of England has condemned Wonga as "morally wrong" and pledged to compete the industry out of existence by boosting credit unions. But Martin Wheatley, chief executive of the FCA, said it was not the regulator's intention to drive payday lenders out of business. "We recognise that payday lending has a role in society. We know that last year 1.6 million people took out payday loans." he told BBC Radio 4's Today programme.

He said more than half of people taking out payday loans pay extra late charges.

"Unfortunately that has been a big part of the business model where the profitability comes from frankly people who can't afford the loan and that is why the additional cap acts as a backstop to stop people ratcheting up loans many many times the original amount."

But money-saving experts warned that the proposed cap would still leave customers paying hefty interest charges on expensive loans. Stella Creasy, the Labour MP who has led the campaign against payday lenders, tweeted that the proposals looked like they "will enable business as usual for legal loan sharks".

The chief executive of Citizens Advice, Gillian Guy, said the cap would help limit the scale of debts, but its success would depend on strong enforcement by the FCA.

"A payday loan cap is not the final piece of the puzzle; consumers need more choice and access to advice. Not only is the clean-up of the existing market essential banks need to step up to the plate to offer a responsible micro-loan."

"Payday loans are often used to cover the cost of daily essentials like gas and electricity bills or rent. The cap has removed some of the gamble of taking out a payday loan but it is still an expensive form of borrowing."

The FCA had shied away from a cap on payday lenders because it feared it would drive people desperate for short-term cash into the arms of illegal loan sharks. Wheatley acknowledged this was a risk: " The actual number of people who consider loan sharks or use them is very very low .... it might increase but frankly that is an illegal segment of the market and we would work very closely with other authorities to ensure that that market doesn't grow."

The FCA will publish its final rules in early November following a consultation period, with the aim of having a price cap in force from January 2015.

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Source: Guardian Web

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