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FCA predicts £420m loss for payday lenders as it sets out fee cap

The FCA has announced plans to cap the fees charged by payday lenders in a move expected to cost the industry £420m a year in revenue.

The new rules, due to come into force in January 2015, mean payday lenders will never be allowed to charge more than 100 per cent of the value of the loan, while interest and fees will be capped at 0.8 per cent per day of the amount borrowed.

The regulator is also threatening to introduce tougher regulations for consumer credit firms if they fail to improve data-sharing for affordability tests. 

FCA chief executive Martin Wheatley says: “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 prediction of a £420m hit to the payday lender sector is based on research which indicates most loans currently pocket lenders between 1 and 2 per cent a day.

The proposals will apply to new loans and loans rolled over from January 2015. The consultation closes on 1 September. 

Payday lenders Wonga and Dollar have recently been forced to pay redress by the FCA. 

Last week the Financial Ombudsman warned of a spike in complaints over payday lending in the last two years. 

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Comments

There are 18 comments at the moment, we would love to hear your opinion too.

  1. Derek Bradley ceo Panacea Adviser 15th July 2014 at 10:00 am

    Let’s park the ethics of all this. The FCA has spent a huge sum on regulating to protect the defaulters, the bad borrowers. Is a saving £193 per year really worth all this trouble and cost?

    Regulation is seemingly hell bent on having millions spent protecting people from themselves. I have never seen a situation where the outcome of regulation is to provide the framework for a regulated business sector to see £420m loss.

  2. Actually the five prongs of: compliance cost (new to the industry), the prospects of endless refunds of fees and charges to those who have failed to honour their contractual agreements (small legalities that never worry the FCA), no ability to recover loans by direct debit; limited rollovers and now a price cap will see the end to this business within months. The net margin of Wonga is 20% pre-regulation which sounds a lot but is probably overstated because the rapid growth hides the underprovision for bad debts that are IBNR. When the FCA cut the interest margin in half that will more than wipe out the 20% margin before allowing for the increased compliance costs etc.

    That spells the end to me. From the regulator’s point of view – job done (their ambition is for there to be no financial transactions anywhere ever, then no-one has anything to complain about). From an NHS point of view it’s a disaster as there will be far more admissions for baseball bat induced concussions and reamed out patellas.

  3. This seems to be a pretty good start towards reigning in the rip-off practices of these loan shark outfits, though I remain curious as to just what procedures and criteria will be mandated to establish the affordability of whatever loan is applied for. A good starting point might well be to cap unsecured borrowing from all and any sources at a (low) multiple of nett monthly income.

  4. So high street banks are still able to charge £75 plus when someone goes £10 overdrawn.

  5. Julian,
    Normally you are a sensible voice, but you are wrong to call these loans a rip-off because you fail to see the other side of the coin, and that is the appalling track record Britons (especially) have for petty criminality and small loan default. We are projected to be witnessing student loan defaults at nearly 50%, and another South African I know who tried payday lending, before Mr Damelin got the formula right to recover enough principal to make it work, simply lost £300K in a matter of months because of the propensity for Brits to game a system (here there was no effective enforcement of repayment so they chose not to). We hear that 20% of all customers of self-checkouts in supermarkets have not scanned, or falsely scanned items. AWT even had some cheese. How many Brits now admit to buying M&S evening wear, wearing it, and then taking it back for the refund the next day? Too many. The British are peculiarly dishonorable as a nation in this regard because payday lenders with experience in other countries have found they have had to use more muscle in their recovery tactics than they ever had to do elsewhere. Even US payday lenders were amazed how reluctant British people were to honour their commitments.

    I wouldn’t use one of these lenders except in absolute extremis for the simple reason that I would try and pay my debts, but in doing so, I’m simply subsidising the thieves.

    Underestimating what vile creatures the UK public can be when given the slightest chance to have off with something for free is the mistake the rose-tinted FCA have fallen into on so many occasions now (really, was every PPI insurance missold? – we all know not but the FCA posted them all an invite to have a free holiday anyway) and on payday loans dreamy headed Stella Creasy has failed to understand her constituents behavioural patterns. I guess we should expect little more from the Archbish, especially when he’s advised by St Hector. This is not to tar everyone with such a slur, far from it, there are many noble and generous people around, but there are a surprisingly high number of petty criminals amongst us too.

  6. @ Jon

    A very good observation !!

    I think I am right in saying banks get around this as “breach in terms” IE-: you have not paid on time within the terms of the contract ? so we will charge an “admin fee” (make of that as you will)

    So we may see payday lenders adopting the same (if they already don’t)

    Lets face it everyone and their uncle now charge on defaulted DD;s and some as much as £45.00, now that is truly despicable !!!

  7. Julian Stevens 15th July 2014 at 2:14 pm

    To Bryan Jones ~ Your opinion is no more or less valid than mine, though the primary issue here is surely the extortionate rates of interest charged by these PayDay lenders that constitute taking advantage of people so desperate for money that they apply for loans on terms that most of us simply wouldn’t countenance. This has been compounded by very nasty, indeed criminal, methods of going after defaulters who very probably shouldn’t have borrowed in the first place.

    I’m certainly no fan of much of what the FCA does but, on this, I think they’re taking appropriate action. The bottom line, perhaps, is that for their own protection some people just shouldn’t be allowed to borrow any more money and that, if they absolutely must do so, lenders should be prevented from imposing terms that represent a high risk of making their financial situation even worse.

    Yes, short term loans may well have their place but the terms should be fair and reasonable (fundamental principles by which we financial advisers are required always to abide), recovery procedures against defaulters should fall squarely within the rule of law (which, we know full well, they frequently haven’t) and, of course, the very first step in the process should be to establish affordability beyond reasonable doubt (isn’t that what all other responsible lenders do?).

    If an applicant has a terrible credit record then how is a PayDay lender doing him/her any favours by advancing yet another loan and an expensive one at that? These organisations aren’t social benefactors founded and run on Quaker principles, they’re in it to make for themselves and for their shareholders as much money as possible and, until recently, without regulation, they’ve been doing it in ways that can hardly be described as ethical, socially responsible or even legal.

    But that’s just my opinion, not right nor wrong, just my opinion.

  8. Hi Julian,
    I’m trying to keep my next part of the debate short!

    This form of lending comes with a lot of risk to the lender and the lender must charge a risk premium for it. Full default is very expensive for a lender and there is a huge price to pay for it. If the regulator is removing some of the tools to keep a lid on default rates, the price will go up.

    I don’t know if 5000% or 1000% or 1% is the right price for covering the rate of default on lending to this demographic, but, it unquestionably has to be very high, and to the less initiated, eye-wateringly high. I’m not going back over whether all this lending is to meet need or want, nor how much default is down to system gaming rather than insufficient resources. But the truth about the “poor’s credit paradox” that means that the cost of borrowing is higher, the less able to afford it you are, is that that, sadly, the poor have a proven track record of being unreliable borrowers.

    But should that preclude them from emergency funds altogether? That is what the FCA are trying to achieve and I’m not sure that helps.

  9. Bryan, risk can be mitigated via stringent lending policy. If you are prepared to give money to anyone then you will certainly have a huge default rate.

    These are vulnerable clients and therefore they are easy prey for unscrupulous lenders. The criteria for lending shouldn’t just be that you have no money. It should be that you have no money but are willing and in a position to repay in the near future.

    If you can combine good lending policy with a reasonable rate of interest then everyone benefits. If they can’t make a profit from lending at 30% APR they shouldn’t be in business.

    These firms have proved themselves to be cowboys and as such they need to start operating within both the laws of regulation and ethics if they are to be allowed to continue.

  10. Well said, Matthew.

    Perhaps Bryan’s real annoyance is that his friends are being brought to heel. Judging by his rather jaundiced view it does not appear to stem from concern that the UK payday borrowers are potentially being deprived of ‘easy’ loans.

  11. ? Brought to heel eh !!!

    What just like the FSA did to us IFA’s, a couple of bad apples and all must suffer !!!

    Look I have no liking for the payday lender’s, but they do have a right to run their business as they wish (within the boundaries of the law) and they do have a place in the market, do not forget the last couple of fines dished out by the FCA for bad practice is only what the banks and building societies have been doing for years and they get away Scott free !!!

    Its not right or fair that the regulator is telling people how to run their own business and how much they can earn, basically running around like a spoilt brat shouting its my ball.
    They just keep trying to save the public from themselves, oh and by the way if they do not listen or read what they get into; no worries you will get compensated in full and a bit of interest to sweeten the deal !!!

    Might is not right and if they are allowed to carry on we will all be wearing orange boiler suits and walking to work single file !!

  12. DH – One of the regulators responsibilities is to protect consumers – and this is by far the the largest and most vulnerable consumer group in the UK.

    Telling firms how to operate is exactly what FSMA was designed to do, these guys have previously been running around without anyone regulating them, now they have, and should be brought into line with the rest of the regulated population. Both principally and ethically.

    Look beyond your hatred of the regulator and try to see what is doing here may be in the best interests of consumers.

  13. @ Matthew

    I don’t disagree, but there are ways and means, and I personally don’t agree with compulsion / dictatorship, as I said I am no fan of payday lenders, much like I am no fan of football, however do you see caps on how they rip people off, on tickets,credit cards, kit etc etc etc, I feel and have always felt consumer education is better to make it more competitive ? IE -: tell them, spell it out make them aware in no uncertain terms. It may be cheaper too; than thematic review after thematic review, which only serves the regulator in as much as; look we earn our money, look at the work we are doing, but never solves the root issue !!!
    If a bar is set (under compulsion), true it wont be breached and like wise, it wont be much under either ? which makes them all the same the only difference is, which advert on the telly are you likely to prefer ?

    My hatred (bit harsh but OK) stems from a lack of respect, they don’t offer me any and more importantly the good we know is in the industry, and it breaks my heart that my clients money indirectly go’s in to fund these people (which in effect is a civil servants position) as they are basically government controlled / driven (gives government deniability) while others get crap wages barely above minimum wage !!!

  14. @Matthew
    All fair points but how much has the regulator taken account of the likely behaviour of firms and consumers as a result of the changes?

    We can probably all agree that these firms will reduce the number of people they are willing to deal with on cost/risk grounds. However, those people dropping off the radar will still have a need and will fulfil it outside of the regulated space. Who cares? Probably not the FCA because they will no longer be ‘consumers’ under its remit so problem ‘solved’ from their perspective. Socially and ethically I doubt there will be a net gain.

    By the way, you refer to ‘ethics’. Whose ethics? Yours or the FCAs? Kant put it very well when he said, “In law a man is guilty if he infringes the rights of others. In ethics he is guilty if he only thinks of doing so.”

  15. If a firm is unwilling to deal with a consumer and the firm has in place a decent lending policy it is likely that the consumer is not willing or able to repay the loan. These are the ‘criminals’ refered to by earlier posters. Let them go and see ‘Barry the Baptist’ for a wad of notes – they are not financial services consumers.

    However they can lend to thier hearts content to people who are willing and able to repay the loan and can take 30% interest for the trouble.

    For ethics – see the Cii or PFS or any other organisation/agency that publishes essentially the same information regarding the fair treatment of consumers.

    My personal ethical view is that If it doesnt feel right – its probably not.

  16. Massively sanctimonious stance on consumer needs Matthew, you should have stopped at your first post…many months ago!!

  17. Sorry Steve, perhaps you could clarify which part is ‘massively sanctimonious’ – Firms lending money should have a decent lending policy or was it that vulnerable consumers should have an element of protection from unscrupulous firms?

  18. Aurangzeb Paracha 22nd July 2014 at 7:20 pm

    its about time the FCA has jumped in and addressed the the issue Paffering pyday Lenders….

    just because their exists an opportunity to exploit the most vulnerable consumers in the marketplace it doesnt mean these lenders should be allowed to do as they will … like all other sectors in the financial industry it is very important to prune practices that are detrimental while at the same time encourage aspects/practices that are positive..

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