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.