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Payday lending industry in jeopardy after new price caps announced

Payday lending industry in jeopardy after new price caps announced
Date of Publication: Tuesday, 11 November 2014 12:19

The future of the payday lending industry is under threat after the City watchdog announced a series of price caps on loans and charges.

 

From January, lenders will be able to charge no more than 0.8% of the loan amount per day, and no more than 100% of the loan amount in total, the Financial Conduct Authority (FCA) has announced.

 

The watchdog has also set a £15 cap on default charges.

 

The news has major implications for the short-term lending industry, whose big-name practitioners have charged fees exceeding 6,000% per year.

 

Lenders have frequently claimed that these representative rates are irrelevant to short-term loans, and that the high fees reflect the realistic costs of high-risk lending and maintaining a high-street presence.

 

But the industry has developed a reputation for irresponsible lending and driving vulnerable people into a spiral of debt.

 

Payday lender Wonga has recently agreed to write off £220 million of customer debts, after new chairman Andy Haste conceded that the firm had not done enough to ensure that it was lending to those who could reasonably afford to repay.

 

On today's announcement, Martin Wheatley, the chief executive of the Financial Conduct Authority, said that the new rules were designed to “put an end to spiralling debts”.

 

"For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections," he said.

 

The New Measures

  • Cap of 0.8% per day in charges.
  • Total cap of 100% of the original loan.
  • Cap of £15 on default fees.

Analysts believe it is inevitable that the industry will shrink, and that many lenders could face an exit from the market.

 

There has already been an exodus in 2013, as the Office of Fair Trading began to step up the pressure on rogue lenders.

 

Mr Wheatley said it was important to develop a responsible industry for short-term lending – a claim echoed by Gillian Guy, the chief executive of Citizens Advice.

 

Ms Guy said it was important to monitor the cap to determine whether it was set at the right level. Concerns have already arisen from within the industry that a smaller payday lending sector would drive people towards illegal loan sharks.

 

“A vital part of this is greater choice,” Ms Guy added. 

 

“High Street banks should seize the opportunity to meet demand and offer their customers a better alternative to payday loans.”

 

Keith McDonald

Which4U Editor

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Tuesday, 11 November 2014 12:19
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