UK Regulator to Cap Prices on Payday Loans

British citizens using payday lenders and other providers of high-cost short-term credit will see the cost of borrowing fall and will never have to pay back more than double what they originally borrowed, the UK’s Financial Conduct Authority (FCA) confirmed today.

Martin Wheatley, the FCA’s chief executive officer, 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 spiralling payday debts. For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections.”

The FCA published its proposals for a payday loan price cap in July. The price cap structure and levels remain unchanged following the consultation. These are:

1. 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.
2. 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.
3. 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.

From 2 January 2015, 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.

Price cap consultation, further analysis

The FCA consulted widely on the proposed price cap with various stakeholders, including industry and consumer groups, professional bodies and academics.

In July, the FCA estimated that the effect of the price cap would be that 11% of current borrowers would no longer have access to payday loans after 2 January 2015.

In the first five months of FCA regulation of consumer credit, the number of loans and the amount borrowed has dropped by 35%.  To take account of this, FCA has collected additional information from firms and revised its estimates of the impact on market exit and loss of access to credit. We now estimate 7 % of current borrowers may not have access to payday loans – some 70,000 people. These are people who are likely to have been in a worse situation if they had been granted a loan. So the price cap protects them.

In the July consultation paper the FCA said it expected to see more than 90% of firms participating in real-time data sharing. Recent progress means that participation in real-time data sharing is in line with our expectations. Therefore the FCA is not proposing to consult on rules about this at this time.  The progress made will be kept under review.

The final policy statement and rules. The price cap will be reviewed in 2017.