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Financial Conduct Authority announces costs cap on payday lenders

The Financial Conduct Authority will set a cost cap of 0.8% per day for payday lenders, it has announced today.

The financial services regulator says the cap on high-cost, short-term lenders will be introduced in January.

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Labour 'glad' that payday lender cost caps introduced

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Labour is glad that cost caps are being enforced on payday lenders, but it wants to see the government do more to "promote safer and more ethical forms of lending," a spokesperson has said.

Cathy Jamieson MP, Labour’s Shadow Financial Secretary to the Treasury, said:

Labour has repeatedly called for the introduction of a cap so we are glad that, despite initial opposition from the Government, action is finally being taken.

However, we believe these changes will need to be regularly monitored to ensure they are effective. That is why we want to see a review by the end of 2015 – much earlier than is currently being recommended by the FCA.

We also want to see more done to promote safer and more ethical forms of lending, and that is why a Labour Government would extend the levy on the profits of payday lenders and use the additional money raised to increase the level of Government funding for alternative credit providers such as credit unions.

– Cathy Jamieson MP

More: Payday loans 'dropped by 35%' since FCA regulation

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Payday loans 'dropped by 35%' since FCA regulation

In the five months since the Financial Conduct Authority took over regulation of consumer credit, the number of loans and the amount borrowed has dropped by 35%.

Chancellor George Osborne said: "We created a powerful new consumer regulator to regulate the payday lending industry and legislated to require the FCA to introduce a cap on the cost of payday loans.

The FCA has now confirmed the cap on the total cost of payday loans - not just the interest rate, but also the arrangement fees as well as the penalty fees - that will come into force in the new year.

This is all part of our long-term economic plan to have a banking system that works for hard-working people and make sure some of the absolutely outrageous fees and unacceptable practices are dealt with."

– Chancellor George Osborne

More: FCA expects number of lenders to fall after cap

FCA expects number of lenders to fall after cap

The Financial Conduct Authority expects the number of payday lending firms to fall once costs caps are imposed from 2nd January.

Martin Wheatley, the FCA's chief executive officer, said:

Our modelling was intended to allow companies that have got good business models and ethical standards to be profitable and to be able to continue in the industry.

That didn't suggest there will be none, it suggested there will be a few but much less than today."

– Martin Wheatley

He told the BBC Radio 4' Today programme that banks could meet up to half of the demand, with credit unions and employer loans also playing a role.

Creasy: Cost cap on lenders 'way too high'

Labour MP Stella Creasy, who has has led a relentless campaign to control the costs of payday loans, has said that the 0.8% cap on costs for high-cost lenders is "way too high," saying it is an "early Christmas present for legal loan sharks."

More: Payday lenders cap - the key points

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FCA 'will have to act to stop illegal lenders filling gap'

The Financial Conduct Authority will have to monitor the short-term lending market to ensure illegal loan sharks don't fill the "credit gap" left by the reduction of 'payday' lenders, the organisation representing some of the best known short-term lenders has said.

Speaking about the cap on the cost of credit, Russell Hamblin-Boone, Chief Executive of the Consumer Finance Association said;

Higher standards of conduct have gone hand in hand with a reduction in loans being approved. With the cap, fewer people will get loans from fewer lenders but the demand for credit will still be there and so there will be no significant impact on debt levels.

The warning signs are already there. Only a quarter of people turned down for loans under tougher lending criteria said that they were better off not getting the money; the rest incurred charges for missed payments.

The regulator will need to monitor this closely and act to prevent illegal lenders filling the credit gap

– Russell Hamblin-Boone

More: Payday lenders cap - the key points

Payday lenders cap - the key points

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An FCA-approved cost cap on payday and other high-cost, short-term lenders will come in effect on 2nd January 2015.

Here are the key points of the announcement.

  • Initial cost cap of 0.8% per day - Lowers the cost for most borrowers. For all high-cost short-term credit loans, interest and fees must not exceed 0.8% per day of the amount borrowed.
  • Fixed default fees capped at £15 - Protects borrowers struggling to repay.If borrowers do not repay their loans on time, default charges must not exceed £15. Interest on unpaid balances and default charges must not exceed the initial rate.
  • Total cost cap of 100% - Protects borrowers from escalating debts.Borrowers must never have to pay back more in fees and interest than the amount borrowed.

According to the FCA, this means that no borrower will ever pay back more than twice what they borrowed, and someone taking out a loan for 30 days and repaying on time will not pay more than £24 in fees and charges per £100 borrowed.

FCA announces costs cap for payday lenders

The Financial Conduct Authority will set a cost cap of 0.8% per day for payday lenders, it has announced today.

The financial services regulator says the cap on high-cost, short-term lenders will be introduced in January.

The latest clampdown on the industry was unveiled by the FCA in July and confirmed today following a consultation period.

In a statement on their website, the FCA's chief executive officer, Martin Wheatley, said:

I am confident that the new rules strike the right balance for firms and consumers. If the price cap was any lower, then we risk not having a viable market, any higher and there would not be adequate protection for borrowers.

For people who struggle to repay, we believe the new rules will put an end to spiraling payday debts.

For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections.

– Martin Wheatley

More: Payday lenders could slip away as watchdog bares teeth

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