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FCA: Payday loan restrictions could harm consumers

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The Financial Conduct Authority has signalled it may not use new powers to cap interest rates on payday loans as consumers could be left ”worse off”.

In a behavioural economics report, published yesterday, the FCA says restrictions on how many payday loans people can take out could hurt people who need emergency cash.

The Financial Services Act 2012 allows the new regulator to cap interest and restrict the availability of payday loans from April 2014. The current payday loan regulator, the Office of Fair Trading, is launching a crackdown on lenders and banned its first firm last month.

But the FCA says: “Many consumers use payday loans because, despite high APRs, that is the only source of credit available to high-risk borrowers in emergencies.

“They might be made worse off by caps on APR or restrictions on how often they can borrow if they reduce availability to some consumers. Indeed, usury laws and similar provisions have been cited as an example of regulatory failure driven by regulators’ own behavioural biases.”

“Usury” refers to the sale of unethical loans with high interest rates, which has led some cultures and religions, such as Islam, to introduce laws to ban charging interest on loans.

The paper also argues that information disclosures have had “little effect” on borrowers’ understanding of payday loans and have not stopped people allowing them to roll over from one month to the next.


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There are 21 comments at the moment, we would love to hear your opinion too.

  1. How can capping 4978% APR down to 500% or less make people who use these lings worse off? It beggers belief. We got into a HUGE mess because people who could not afford to borrow money borrowed it (at normal rates). What is the effect going to be if more skint people borrow more money at ridiculous rates. The FCA are starting to looking as though they will be as incompetent as their predecessor. Words escape me

  2. What’s the difference between a loan shark and a payday loan company.

    Answer: Consumer credit licence and FCA turns a blind eye to loan shark rates.

    The people I feel sorry for are the ones in desperate situations who are looking for a regulator to at least do the decent thing by capping interest rates. It’s okay for those people in ivory towers who get paid high salaries and have access to cheap credit.

    Pray they never lose their job and have to rely on payday loan companies!

    The headline should have read “FCA fails millions of poor people by not capping payday loan rates”.

  3. This beggar’s belief. The only way to treat payday loans is to ban them completely. The Regulator is concerned about educating the public in financial matters. Let’s make a start by showing that rule one is to live within your means and know how to budget. Consumers are heavily disadvantaged by the very existence of payday loans.

  4. Is it the consumers or the providers they are looking after here? Who are those providers?

  5. @Marty: Because otherwise they would not get a legal loan at all, and probably fall on loan sharks, or worse.

    The FCA is entirely right. Caveat debitor. Attempting to ban people who can’t or refuse to manage their finances from getting into difficulty is a losing battle. There an infinite number of ways for them to do that other than payday loans.

  6. You lot of rabid frothers, honestly. There are two key reasons for high APRs that have nothing to do with usury. First they include fixed administration charges such as bank transfer charges and credit check fees, which must be included with the often much smaller interest element to calculate APRs. Because loans are so short term the effect of compounding, say a £25 bank CHAPs fee many times over to annualise it, creates your high APRs. And second, interest rates are loaded for bad debts. That’s why credit card interest rates sometimes go up, when market interest rates are going down – becuase lenders are being hit with a rise in defaults. Very often you have your fellow man to blame for “being ripped off” because when they default, they are, by definition stealing from you.

    So few people know so little about what they gob off about. Meanwhile, well done FCA.

  7. Jonathan Midgley 11th April 2013 at 1:08 pm

    Bryan Jones- Do you not believe that these companies have anything to answer to!?
    I was recently victim of a fraud via a well known pay day lender, where it would appear my details were used to obtain credit.
    If you look at the internet this is rife, and even within my circle of acquaintances I have come across 2 other people this has happened to with the same company!?
    The company inolved is well known for advertising credit within 15 minutes!!! How do you think they do that!? How can you check someones identity, perform credit checks and perform money laundering checks on bank details within that time.
    In my case, and I suspect most, they actually don’t and ironically the credit check you list in their many costs, did not actually take place!!!!!

  8. Major supermarket chains back the Conservative party financially and plans to charge a minimum price per unit of alcohol are dropped. Wanger also back the same party financially so why is anybody surprised.

  9. Bryan Jones | 11 Apr 2013 11:50 am

    I am sure that there is a big difference between the APR on a credit card and that for a pay day loan.

    Most people on here, being qualified financial advisers, know exactly why interest rates for unsecured loans are higher than secured loans and how to calculate APR.

    The bottom line is that an APR of over 4000% is extortionate.

    You do have to wonder the thinking behind this decision – its like claiming that a minimum price for alcohol would hit responsible drinkers when we all know that responsible drinkers would hardly be affected by it.

  10. A few years ago lenders charging 4000% APR (and it doesn’t really matter whether that’s charges or interest it’s still the same cost) were the preserve of sink estates. The collectors wore donkey jackets and carried pick axe handles, and the red top newspapers were full of outrage – quite rightly so!

    It now seems that if the jackets and handles are replaced by a website and a cheap TV commercial during Jeremy Kyle, it’s suddenly OK.

    Bryan Jones you don’t work for Wonga or such like per chance?

  11. Another ‘Behavioural Economics’ report from the FCA that misses the main point entirely in my opinion.

    Running out of money at the end of the month is not generally a condition that can be cured by borrowing more money. That’s simple common sense.

    The fact that the regulator seems happy with the present situation frankly beggars belief. If they were truly ‘consumer’ focused they’d be doing everything possible to wean vulnerable people off this particular teat.

  12. One of the things I am a bit surprised about is that CMC are not targeting clients of these payday loan companies.

    Surely it would be an easy claim in court as these companies have broke every single rule under the consumer credit. After all how can you make a reasonable assessment of whether alone is affordable within 15 minutes.

    I suspect the reasons why CMC are not is partly due to the type of clients these payday loan firms attract.

    Furthermore, I seem to remember a court case many years ago where the judge set aside all of the interest that the company was charging because he deemed it to be unreasonable. I might be wrong on the last point as I am working from memory.

  13. Having read the Koran, I don’t think Mohamed (PBUH) banned alcohol because he thought it would do damage to all men, but because it did damage so often through misuse. Exactly the same with gambling and usury. The idea of alcohol, gambling and interest in moderation is theoretically fine, it is when it gets abusive that it becomes a problem. The FCA are choosing the hard way, by not banning. The easy way is to ban, but whether it would work or not is another matter as others have said. I have met a lot of Muslims over the years, many of whom drink and gamble but know if they get caught doing either too much, the state will not support them at all, unlike the UK who seems to support irresponsibility.

  14. I am glad that the FCA realized the need for this type of business in the US. If the consumer uses the services as it is designed, as I have done, then the APR is nothing. I ran into trouble last year and I took out a five hundred dollar payday loan. I paid it back on my next payday. I have not used it since. What would the APR be for that? I was glad to have this service available when I could not get a credit card or bank loan. It really came through at the right time. It is easy to judge but when it is you in need, you are glad that these types of businesses exist.

  15. @ Chris it sounds like you used the right tool for the job, the problem is when you take out a hammer that you have been given by the person who says they are helping keeps swapping it for a bigger and bigger hammer and then u find it to heavy to lift and blame the hammer rather than the person who keeps giving you a bigger one when you say “hit me”.

    Much better payday loan regulation is needed so legalised loansharking is made the last resort of a short term need and not a way of putting off the inevitable as the banking crash itself may well have been.

  16. OK so you are concerned that borrowing money at 4000% APR may be a persons only available credit option. Well then instead of banning it completely why not just put extra restrictions above a certain percentage. Such as the borrower has to apply for two other quotes from a list supplied to them by the regulator and only if those two other quotes cannot better the interest rate will the loan be allowed.

  17. I wonder If any borrower really understands that @ 4000% if he borrows just £1 and doesnt pay it back in a years time he will owe £4000 !!!

    This is Loan Sharking being legalised

  18. It would be interesting to know how many of these borrowers ultimately go bankrupt. Any that do, will have a potentially much larger cost in servicing debts working up to the ‘write-off’ point.

  19. @ Andy King

    Not wanting to be pedantic but if someone borrows £1 at 4,000% APR – does he not owe £41 after one year?

    Still an extortionate amount of interest

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