Payday lenders have been struck by a hefty blow, as the cityís financial watchdogís forthcoming regulations leave them standing to lose over two-fifths of their revenue.
Key to the reformatory process, to be conducted by by the Financial Conduct Authority (FCA), is the stipulation which will cause borrowers taking out payday loans to never have to repay over twice the sum initially borrowed. This measure will cost the much maligned, billion pound industry a projected £420m in lost proceeds, according to the FCA.
Although on average, a borrower will save £193 a year due to these measures, many money-saving authorities remain sceptical due to what they perceive as a lack of ruthlessness from the regulator. For instance, debt charities believe the measures to be too lenient to wholly protect borrowers from reckless lending.
“A payday loan cap is not the final piece of the puzzle; consumers need more choice and access to advice,” said Citizens Advice chief executive Gillian Guy. “Not only is the clean-up of the existing market essential, banks need to step up to the plate to offer a responsible micro-loan.î
She added: ìPayday loans are often used to cover the cost of daily essentials like gas and electricity bills or rent. The cap has removed some of the gamble of taking out a payday loan, but it is still an expensive form of borrowing.î
The Church of England has offered its two pennyworth dubbing Wonga, widely recognised as the face of the payday lending industry, ìmorally wrongî and going on to state it would commit its resources to enhancing credit unions with a view to outcompeting the payday lending industry in its entirety.
However, Martin Wheatley, chief executive of the FCA, took a more moderate view, stating that catalysing the demise of payday lending is not the watchdogís intention, rather he believes that ‘payday lending has a role in society’.
The FCA states that roughly 1.6 million people took out 10m loans worth around £2.5bn; over half of this number suffered extra costs incurred due to the tardiness of their repayments.
Wheatley attempts to justify the FCA measures: “Unfortunately that has been a big part of the business model, where the profitability comes from, frankly, people who can’t afford the loan, and that is why the additional cap acts as a backstop to stop people ratcheting up loans many, many times the original amount.”
Following implementation of FCA plans, someone who took out a £500 loan from a payday lender, and paid it back within the allotted 30 day period, would pay a maximum of £120 in costs. Capped at £15, alongside a total price cap of 100% of the original loan, fees for late payment have been cracked down on hardest by the regulator, as it seeks to prevent default charges from soaring to the absurdly high levels certain customers have endured in recent times.
Following a brief consultation period, the FCA will release a final draft of its rules by November with a view to legislating the price cap by January 2015.
The move has come in for criticism from other areas of society too, with Stella Creasy, the Labour MP, who also acts a key player in the campaign against payday lenders, bemoaning the UKís position regarding payday lenders when comparing her with other countries:
“Anyone who thinks today’s announcement is the end of legal loan sharking in Britain is in for a nasty shock,” she said. “Without further revision, this total cost cap of 100% of the borrowed amount will leave British consumers less well protected than their counterparts in Japan and most of Canada and the United States. Not everyone who takes out a payday loan gets into financial difficulties, but enough do due to the terms and structure of the loans.î
ìIt is clear the business model is not fair. If the level of the cap does not remove the incentive to do this it is meaningless. That’s why the FCA should, and could, go much further in providing the protection consumers in Britain need from the vicious cycle of debt these loans all too often create.”
The Labour party, as a collective, have urged government to push forward the cap to October, so as to prevent the public from over-indulging in risky loans at Christmas.
Martin Wheatley shed light on the regulatorís increasingly calm attitude towards the effect of illegal loan sharks on society: ìThe actual number of people who consider loan sharks or use them is very very low Ö it might increase, but frankly that is an illegal segment of the market and we would work very closely with other authorities to ensure that market doesn’t grow.”