LONDON – Britain’s financial regulator says a crackdown on payday loans is saving vulnerable consumers £ 150million a year in fees.
The Financial Conduct Authority (FCA) said on Monday that a review of its payday loan price cap, first introduced in 2015, found that 760,000 borrowers are saving a total of £ 150million per year. The average cost of a high interest short term loan has dropped from over £ 100 to around £ 60, says FCA.
Short-term, high-interest loans – dubbed “payday loans” because people often took them out to cover deficits until payday – exploded in the wake of the 2008 credit crunch.
The Office of Fair Trading, which regulated the sector until 2014, found that this type of loan caused “hardship and misery” to many borrowers struggling with unaffordable debts. While the loans were short term, interest could reach 5,000% if calculated annually. Stella Creasy of Labor and the Archbishop of Canterbury were among the public figures who campaigned against the sector.
The FCA took over regulation of the industry in 2014 and cracked down on the industry. Since then, companies in the sector have been ordered to repay more than £ 300million in unaffordable loans and fines and 1,400 lenders have since gone out of business.
The FCA said on Monday it found that the cap, which limits daily interest to 0.8%, means businesses are much less likely to lend to customers who cannot afford to repay. Debt charities are also seeing fewer customers with debt issues related to high cost short-term credit.
As a result, the FCA leaves the price cap in place and will review the policy in 2020.
“Fundamental changes” needed for overdrafts
While the FCA is happy with its actions in the short-term, high-priced loan market, the regulator says it now has concerns about other areas of lending – mostly with unexpected overdrafts.
FCA launched a review of unexpected overdrafts last November. Search by consumer group Which one? unexpected overdrafts can be up to eight times more expensive than payday loans and Labor MP Rachel Reeves called for a fee cap.
Bank customers who are overdrawn and have not pre-arranged an overdraft may face charges of up to £ 6 per day from some High Street lenders. The Competition and Markets Authority (CMA) noted that banks earn £ 1.2 billion from unexpected overdraft fees.
The FCA says unplanned overdrafts are too complex, which means those who are forced to access them don’t know the real cost. The regulator says the costs are also too high. “Fundamental changes in the way unsettled overdrafts are provided may be necessary,” warns the FCA.
FCA CEO Andrew Bailey said in a statement: “The nature and extent of the problems we have encountered with unsettled overdrafts mean that maintaining the status quo is not an option. We are now working to resolve these issues while preserving the parts of the market that consumers find useful. “
Lloyds Bank announced earlier this month that it completely eliminate unforeseen overdraft fees. This is probably a preventive measure before an expected crackdown by the FCA.
“High cost credit products remain a key objective”
The watchdog is also concerned about: the “rental with purchase option” market, where consumers pay rent on an expensive item like a washing machine or television while paying full price; home loan; and the catalog credit industries, where catalog retailers provide credit to people who buy their products.
Bailey said in a statement on Monday: “High cost credit products remain a priority for us because of the risks they pose to potentially vulnerable customers. We are pleased to see clear evidence of improvement in the payday loan market after a period when customers and their business models were often unacceptable.
“However, there is more we can do, and this review aims to identify areas where consumers may be harmed so that we can focus our efforts accordingly.”
The FCA is also examining the auto finance market, which has grown rapidly in recent years, to assess whether consumers are at risk.
The Bank of England has raised concerns about the rise of so-called “PCP” automobile financing arrangements, where consumers actually rent cars from manufacturers. Banks are exposed to £ 20bn of credit risk associated with PCP finance loans, BoE estimates.
FCA said: “We consider that the direct exposure to risk to the consumer may be more limited, but may be increased where there has been an inadequate assessment of affordability and / or a lack of clarity for the consumer in his understanding of the contract. . “