The cap on payday loans works, it’s now time to look at other markets

31 Jul 2017

Today the Financial Conduct Authority (FCA) published their feedback statement on its review of high-cost credit, namely payday loans.

Their decision has been to keep the current cap on payday loans at 0.8% per day, and ensuring that customers never pay more than 100% in fees and interest of the amount borrowed. The FCA are happy with continuing this cap because

·         Lenders are still active in this market

·         There has been improved outcomes for consumers

·         Consumers pay less, and

·         There is evidence for price competition in the market.

It is welcome news that the FCA record a rise in the availability of multiple installment loans where there has been an overall drop in the associated default rates. It is also very welcome that the FCA will closely monitor this market, particularly in light of consumers who once used payday loans now turning to these longer term products.

It is encouraging that the FCA has not found evidence to say that consumers who have been unable to get a payday loan since the cap have generally had negative consequences as a result. The majority (63%) of consumers turned down for HCSTC products since the cap was introduced believe that they are better off as a result. This is something Toynbee Hall, in partnership with Coventry University, will be looking at in detail over the course of this year.

The decision to seek to identify areas of concern in other parts of the high cost credit market, namely in the rent-to-own, home-collected credit and catalogue credit markets, as well as now with overdraft charges and the potential associated debt trap for some customers, is good and something we will monitor.

Carl Packman, Research and Good Practice Manager at Toynbee Hall, and the author of two books on high cost credit markets, has said:

“Today’s news from the FCA is very welcome and it’s particularly encouraging that the FCA finds no evidence for increased negative consumer experiences as a consequence of their regulatory actions.

“The cap and increased regulations and enforcement of the rules have worked to curtail bad practice and reduce the cost of credit. We note today that it has also generated more price competition in the market.

“It worked as a remedy to fix the cost of credit in a market where competition was at a standstill, namely because loans made before the cap were statically priced with most providers charging £29 in every £100 lent.

“But there are still significant challenges for consumers. What’s been less successful in the time since increased FCA regulations on the high cost credit market is the increased supply of alternative affordable credit at scale across the UK to ‘fill the gap’ of payday market exit. This needs addressing.

“We are also concerned about the root causes of unsustainable personal credit use, primarily low incomes failing to compete with the cost of living. While today’s news is welcome it’s important to remember this.”

Case Studies:

Case study 1: Ahmed

Ahmed is 59, lives in London and moved to the UK 22 years ago. He has two children but no close family in the UK. Now unable to work due to osteoarthritis and stomach ulcers, he last worked as an interpreter and kitchen porter.

He took out a payday loan of £100 in late 2016 so that he could pay off a number of smaller debts and paid £10 every fortnight. He also has used doorstep loans in the past.
He finds short term lenders “very helpful and understanding” and said “They help people in need, and really understand your situation”.

Case study 2: Tom

Tom is 26 and works as a recycling operative. He lives with friends in shared accommodation in Bristol. He works via an agency and his income fluctuates: sometimes he earns nothing in a week and on other weeks he can earn as much as £300.

He has previously been in debt totaling £13,000. £300 was on his overdraft with the remainder divided up by 13 other personal loan companies, including payday lenders. For him it had become so bad that his entire wages were being used to pay the interest on loans so he’d have to borrow again to live.

“My flatmate had a very good credit rating and they rejected him, whereas they accepted me and I was £8,000 in debt. I think they only want those who can’t pay”.

You can find the FCA High Cost Credit Review Feedback Statement here.