The Financial Conduct Authority (FCA) has laid out its plans to put an end to the unrestrained, ruinous payday lending sector, which include a guarantee that from January no borrower will ever repay more than double the amount initially borrowed.
The watchdog has laid out a number of measures to prevent borrowers from being subjected to the same exorbitant costs & ever-increasing debts that have led to many individualsí lives being ripped apart, with noted instances of suicide stemming from the helplessness felt as a result of the unrelenting hostile tactics deployed by certain payday lenders.
These reformatory measures include the imposing of a 0.8% cap on daily interest rate and fees for all high-cost, short-term credit loans; the assurance that no borrower will have to pay more than the sum initially borrowed in fees and interest; the implementation of a default fee of £15 for any ailing borrower who fails to make a repayment on time.
The FCA declared that an individual who has taken out a loan for 30 days, and successfully made repayments on time, will never pay more than £24 in fees per £100.
The above measures follow on from the FCAís initial proposals to crack down on the payday lending sector in July, and the price cap percentage along with the other measures largely remain the same following the consultation period which ensued from the end of July. During this consultation period, the FCA liaised with numerous influential bodies including professional bodies, academics & scholars and a number of consumer & industry groups, who by and large all reached a consensus which represents the foundation for Januaryís scheduled enactment of the above measures.
Martin Wheatley, the FCAís chief executive officer 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.’
Mr Wheatleyís implication is that the FCA entertain the prospect of a regulated payday market, with the new measures focussed on establishing which group of borrowers are entirely unsuitable for a payday loan and protecting these individuals from themselves. To this effect, the regulator has projected around 7% of borrowers, roughly 70,000 people, will be ineligible for a payday loan ñ those ëlikely to have been in a worse situation if they had been granted a loaní.
Here quoted from BBC Radio 4ís Today programme, Mr Wheatley said: ìWe donít want to close the industry, we want to change it so that it operates in a way that delivers good outcomes.î
Recently, the FCA asserted that 99% of the payday lending sector will be forced to shut down as they are unable to comply with the curtailments on the cost of credit, with only the top bananas ñ Wonga, Dollar Financial and QuickQuid, who consume 70% of the market share between them ñ able to stay in business.
However survival does not equate with the same quality of success, as these companies are expected to lose 42% of their revenue following Januaryís introduction of the new rules, whilst borrowers will enjoy a collective saving of £250m.
George Osborne, the Chancellor, took the opportunity to laud the Coalitionís creation of the current financial watchdog and their subsequent decision to imbue the FCA with the appropriate powers to succeed in their aims:
The FCA has now confirmed the cap on the total cost of payday loans – not just the interest rate, but also the arrangement fees as well as the penalty fees – that will come into force in the new year.
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.”
However, influential consumer-orientated bodies appeared reflective on the matter. Whilst unquestionably approving of regulatory action being taken against the payday sector, Citizens Advice warned policymakers to be vigilant towards any shadiness payday lenders could seek to delve into in attempts to maximise profits.
Gillian Guy, chief executive of Citizens Advice, said: “People who are in a position to borrow need a responsible short-term credit market. A vital part of this is greater choice. High Street banks should seize the opportunity to meet demand and offer their customers a better alternative to payday loans.
“The FCA should monitor the cap, including whether it is set at the right level, to make sure it is working for consumers. They must also keep a close eye on whether lenders are sticking to the rules.”
With other fears over the potential return of illegal loan sharks as the most attractive option to individuals being subjected to tighter restrictions on the availability of credit, it is apparent regulatory action on the sector must be firm & thorough.