People using payday lenders and other providers of high-cost short-term credit will see the cost of borrowing fall significantly under proposals announced by the Financial Conduct Authority (FCA) today.
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% of the amount borrowed. This lowers the costs for those borrowers paying a daily interest 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 our large sample, firms are currently generating revenue of between 1 and 2% per day from borrowers. We expect that our 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%).
We estimate that these consumers will save on average £193 per year, translating into £250m annual savings in aggregate[1]
The full proposals and methodology can be found online[1].
Striking the right balance
To design a cap that allows enough payday firms to carry on lending to borrowers who can benefit, but protects consumers against spiralling debts and unaffordable loans, the FCA has carried out unprecedented levels of research. This 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 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.
Making sure only firms with a consumer-centric approach can do business in future
From December 2014 payday lenders will need to apply to become fully authorised by the FCA. The FCA will carefully 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.
Improving the way firms share data about customers
Since it took over regulation of consumer credit the FCA has strongly encouraged firms and credit reference agencies to improve the way they share information about consumers, so firms can be sure that the information they use in their affordability assessments is up-to-date and accurate. Effective real-time data sharing should enable firms to address the issue of consumers taking out multiple high-cost short-term loans from different providers at the same time that they are unable to afford.
The FCA expects to see evidence of a significant increase in firms participating in real-time data sharing by November, and better coverage by real-time databases. If we do not see the level of progress we require, we will consult on the introduction of data-sharing requirements.
Notes for editors
- The consultation paper and methodology[1].
- The draft rules can be found in appendix 1.
- Payday loan facts and figures for 2013:
- 1.6 million consumers took out 10 million loans, with a total value of £2.5 billion.
- The average loan has a principal of around £260 lent over an initial duration of 30 days.
- In 2013, the average number of payday loans taken out by a customer was 6, from multiple firms – repeat lending is an increasing trend.
- The findings of the FCA’s survey of people that use payday firms shows that, on average:
- Income and age: on average users are younger than the UK population as a whole (33 versus 40 years) and have lower income levels (£16,500 versus £26,500 per year).
- Savings: 57% have no savings; most of those who do save have less than £500 (compared to a median of £1,500 to £3,000 for the UK population).
- Other borrowing options: 64% have outstanding debt from other types of lender, mainly credit cards (20%) and overdrafts (28%) and on household bills or mobiles (28%[2]. 24% said they chose to apply for HCSTC because it was their only option. 36% of borrowers also borrowed from family and 18% from friends[3].
- Loan use: 55% said they used loans for everyday expenditure (housing, basic living costs and bills) and 20% for discretionary spending (for example, holidays, social activities, weddings and gifts)[4].
- Financial distress: Since applying for a loan, 50% reported experiencing financial distress and 44% missed at least one bill payment.
- The FCA’s final rules for payday lenders, and all other consumer credit firms[2], were published in February 2014.
- In June 2014 the FCA secured an agreement from payday firm Wonga[3] to pay compensation to 45,000 people that had been sent letters from non-existent law firms.
- In July 2014, payday firm, Dollar, agreed to refund £700,000 to customers[4].
- The FCA took over responsibility for the regulation of 50,000 consumer credit firms from the Office of Fair Trading on 1 April 2014.
- On 1 April 2013 the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure and appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers. These statutory objectives are outlined in the Financial Services Act 2012.
- Find out more information about the FCA.
Notes
[1] These savings are to consumers who pay back on time, those who pay later than they expected and those who do not pay back (reducing their debts).
[2] Credit reference agency data where balance greater than zero.
[3] Consumer survey responses from ‘less marginal successful’ group. Records whether consumer reports having actually borrowed since application for HCSTC (July-November 2013).
[4] Consumer survey responses from ‘less marginal successful’ group.