The Financial Conduct Authority has proposed a cap on payday lending with a consumer-centric focus, meaning the amount that high-cost short-term credit lenders can charge will be significantly lower.

From January, 2015, the regulation will mean that consumers will never pay back more than twice what they have borrowed. A cap will be placed on interest and fees at 0.8% of the amount borrowed per day, the total cost limited to 100% of the loan, and defaults or arrears fees capped at £15.

Securing protection for consumers: New regulations on payday lenders aim to protect consumers from spiralling debt and unaffordable loans.
Securing protection for consumers: New regulations on payday lenders aim to protect consumers from spiralling debt and unaffordable loans.

Price caps for payday lenders

The changes are in keeping with the government’s campaign on tackling the downward spiral of debt in the UK. High-cost short-term creditors, in particular pay day loans, have become considerably more prominent in recent years, and are seen by consumers as a quick and easy solution to financial management; the reality being that, by taking out such a loan, consumers face a lowered credit rating, with fees and potential interest rates of 4,000%, resulting in a spiral of catching up on further debt.

The FCA took over the regulation of approximately 50,000 consumer credit firms from the Office of Fair Trading (OFT) in April, 2014. The FCA’s objectives from the beginning have been to secure protection for consumers, promoting effective competition in the interests of consumers, and ultimately enhancing the integrity of the UK financial system.

Encouraging a consumer-centric approach

It is anticipated that the new regulations will half the market supply. Recent research conducted by Harrington Brooks revealed that 45% of our customer base have pay day loans, and each of the customers have an average of 3 loans, mostly with different lenders.

From December, 2014, payday lenders will need to make changes in keeping with the consumer-centric regulations, with the FCA ensuring companies are “treating consumers fairly and following the new rules; particular attention will be paid to whether or not firms are trying to avoid the price cap. Firms that do not meet the required standard will not be allowed to carry on offering payday loans.”

CEO of Harrington Brooks, Matthew Cheetham, stated,

“I welcome the capping of the interest on payday loans. Just under half of Harrington Brooks customers have a payday loan as one of their creditors, so anything which reduces the cost to them is welcomed”.

“Confident we have found the right balance”

The proposal comes as the result of extensive research, on the FCA’s part, in understanding the market and the consumers that use it. The new caps on loans have been designed to protect consumers against spiralling debt and unaffordable loans, and also to allow payday lenders to continue lending to borrowers who may benefit from it.

According to the proposal, this research involved:

  • building models of 8 firms and 16 million loans to analyse the impact on firms and consumers post-cap
  • analysing credit records for 4.6m people to understand the alternatives people turn to when they don’t get payday loans and whether they are better or worse off
  • a survey of 2000 consumers that use payday firms to understand the impact on people who don’t get past the approval process and those who do get loans
  • liaising with overseas regulators that also use a cap and reviewing existing research
  • discussions with industry and consumer groups

The finalised rules are to be published in November, 2014 so that affected companies have time to make changes in keeping regulations.

Martin Wheatley, CEO of he FCA, said:

“For the many people that struggle to repay their payday loans every year this is a giant leap forward. From January next year, if you borrow £100 for 30 days and pay back on time, you will not pay more than £24 in fees and charges and someone taking the same loan for 14 days will pay no more than £11.20. That’s a significant saving.
“For those who struggle with their repayments, we are ensuring that someone borrowing £100 will never pay back more than £200 in any circumstance.

“There have been many strong and competing views to take into account, but I am confident we have found the right balance.

“Alongside our other new rules for payday firms – affordability tests and limits on rollovers and continuous payment authorities – the cap will help drive up standards in a sector that badly needs to improve how it treats its customers.”