Payday rules: too tough or not tough enough?
The regulator has taken firm action against controversial payday lenders who may now face a battle for survival.
Stories of consumers being charged interest running into thousands of percentage points prompted an inquiry which has now concluded with rates to be capped at 0.8% per day and 100% of the total loan.
But even this cap is regarded by some consumer groups as too high and not enough to stop borrowers taking on new loans and continuing to have the same problems with repayment. Citizens Advice Bureaux in Scotland says it sees 100 people a week suffering from problems of repaying loans.
CAB Scotland wanted automatic fines for payday lenders, with compensation for the borrower, for each breach of FCA consumer credit rules. It also wanted limits on the number of attempts a payday lender can use to access a customer’s bank account, and also limit the ‘roll over’ on any loan to just one extension.
However, the payday firms themselves have found friends among those wondering if the new rules are so tough they will threaten their existence.
Dr John Gathergood, an associate professor in economics at the University of Nottingham who has worked with the FCA on the cap, told The Guardian that it may be no high street payday lenders operating in the UK next year as a result of the price cap policy. Many will not be able to sustain a business model on lower returns from their customers.
A big worry is that cash-strapped consumers will find themselves forced into the arms of unscrupulous back-street lenders operating outside the law or from overseas. To that extent, the rules may create a new problem.
The FCA has acknowledged that 7% of current borrowers may not have access to payday loans – about 70,000 people – after its new reforms take effect on 2 January. A recent survey found that four in 10 people who are rejected for a payday loan were able to get a loan from another short-term lender. Students struggling with fees are among those who have become increasingly reliant on payday firms.
At least by capping the total interest at 100% it means no one taking out a loan through a payday lender will have to repay more than the sum borrowed. There will also be a 15% cap on default charges.