The UK’s financial watchdog is clamping down on payday loans, with new rules to ensure that borrowers are never forced to repay more than double the amount of their original loan.
The Financial Conduct Authority (FCA) said interest and fees will be capped at 0.8% a day, lowering the cost for most borrowers, while the total cost of a loan will be limited to 100% of the original sum. Default fees will be capped at £15 in an effort to protect people struggling to repay their debts.
The changes, which will come into force on 2 January, mean that someone borrowing £100 for 30 days will not pay more than £24 in fees and charges if they repay the loan on time.
But the Labour MP Stella Creasy, who has led the campaign against doorstep lenders, slammed the FCA plans – unchanged from an original draft published in July – as an early Christmas present to the “legal loanshark” industry.
The FCA said it did not want to drive payday lenders out of business. The regulator estimates the lenders will lose 70,000 borrowers, 7% of the total market, as a result of the changes, as they restrict less profitable loans.
Martin Wheatley, the FCA chief executive, 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.”
In the five months since the FCA took over regulation of consumer credit, the number of loans and the amount borrowed has dropped by 35%.The chancellor, George Osborne, said: “We created a powerful new consumer regulator to regulate the payday lending industry and legislated to require the FCA to introduce a cap on the cost of payday loans. This is all part of our long-term economic plan to have a banking system that works for hard-working people and make sure some of the absolutely outrageous fees and unacceptable practices are dealt with.”
But critics accused the FCA of allowing “legal loan sharks” to slip through the net. “Today’s news will be welcomed as an early Christmas present for Britain’s legal loansharks,” said Creasy. “This cap is just £1 lower than their current charges. This is an industry where some firms are making nearly three quarters of a million pounds a week from British customers – such a high cap will do little to tackle these rip-off 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.”
She said borrowers in Japan, Australia, Canada and parts of the US have better protection than UK consumers.
Debt charities gave the plans a cautious welcome, but urged the regulator to ensure that lenders did not simply change their business model to flout the rules.
Joanna Elson, chief executive of the Money Advice Trust, which runs National Debtline, said: “We hope that these measures will bring an end to the inappropriate lending that we have seen from this industry. However, the FCA will need to be vigilant to ensure that lenders do not simply change their business models to try to evade the rules.”
She added that even under the new rules, many people will still end up repaying very high amounts when they would be better off with free debt advice from charities.
The Consumer Finance Association (CFA), which represents some of the best-known payday lenders, has said the plans will drive some firms out of business. It estimates that only four players will remain in the market: three online lenders and one high street chain. “We will inevitably see fewer people getting fewer loans from fewer lenders,” said Russell Hamblin-Boone, chief executive of the CFA.
Wheatley said payday lenders could disappear from the UK high street within a year, although the FCA’s modelling suggested it was more likely that a few players would remain. Speaking on BBC Radio 4’s Today programme, he said: “We don’t want to close the industry, we want to change it so that it operates in a way that delivers good outcomes.”
He dismissed industry claims that thousands of people would lose out as a result of tighter access to credit, saying there were “a lot of myths in this space”.
According to FCA modelling, a majority of the 70,000 people who will no longer have access to payday loans will make do without getting a loan; others would borrow from family or an employer and only 2% would go to a loan shark.
