The Financial Conduct Authority (FCA) has announced proposals which should mean people using payday lenders and other providers of high-cost short-term credit will see the cost of borrowing fall significantly.
The FCA’s proposals for a cap on payday lending mean that from January 2015, for new payday loans, including if they are rolled over, interest and fees must not exceed 0.8% per day of the amount borrowed. Fixed default fees cannot exceed £15 and the overall cost of a payday loan will never exceed 100% of the amount borrowed.
Martin Wheatley, the FCA’s chief executive officer, 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.”
The FCA’s key proposals are as follows:
- Initial cost cap of 0.8% per day. For new loans, or loans rolled over, interest and fees must not exceed 0.8% per day of the amount borrowed. This lowers the costs for those borrowers paying a daily rate above the initial cost cap.
- Fixed default fees capped at £15 – Protects borrowers struggling to repay. If borrowers cannot repay their loans on time, fees must not exceed £15. Interest on unpaid balances and default fees must not exceed 0.8% per day of the outstanding amount.
- Total cost cap of 100% – Protects borrowers from escalating debts. Borrowers must never have to pay back more in fees and interest than the amount borrowed.
For most loans in the FCA’s large sample, firms are currently generating revenue of between 1 and 2% per day from borrowers. The regulator expects that its price cap will have a significant impact for many borrowers on the charges they are incurring and we estimate firms will lose £420m in revenue per year (approx. 42%).
The FCA estimates that these consumers will save on average £193 per year, translating into £250m annual savings in aggregate.
The final rules will be published in November 2014 so that affected firms have time to prepare for, and implement, the changes. The impact of the cap will be reviewed in two years’ time.
From December 2014 payday lenders will need to apply to become fully authorised by the FCA. The FCA will assess their business models and management structure to ensure they 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.