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:
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
The full proposals and methodology can be found online.
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:
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 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.
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.
 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).
 Credit reference agency data where balance greater than zero.
 Consumer survey responses from ‘less marginal successful’ group. Records whether consumer reports having actually borrowed since application for HCSTC (July-November 2013).
 Consumer survey responses from ‘less marginal successful’ group.
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