Payday price cap confirmed by FCA

11 November 2014 Press Release – The Financial Conduct Authority (FCA) confirmed that people 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.  

As of the 2 January 2015 the payday industry will have to follow new rules that will see several restrictions put on their interest rates, fees and default charges. The FCA put forward these new rules as proposals in July this year and the after close examination all three proposals went through. The following regulations will soon apply to the payday lenders:

  • Protection from snow-balling debt. The total cost of a loan must not exceed 100%. In other words if you take out a loan of 25 pounds, for example, the costs, fees, and interest on that loan, in total may not be more than 25 pounds. A payday lenders will not be able to charge you more than 50 pounds for that short-term cash loan.
  • A substantial drop in the cost of a payday loan. A payday loan may not cost you more than 0.8% per day. This means that on any short term credit loan, a payday lender can only charge you 0.8% of the amount you borrowed. That 0.8% in inclusive of interest, fees and charges.
  • Protection for borrowers who are having difficulty paying the loan back. Default charges are fixed at 15 pounds. Lenders may only charge up to 15 pounds in fees if a borrower defaults on repayment. Also any interest charged on defaulted payments or defaulted charges cannot be more than the original rate.

Over and above these regulations the FCA has also consulted on various other matters that apply to the payday industry. As the payday industry becomes more regulated and willing to cooperate with authorities codes of conduct are slowly being put into place. In several instances payday lenders are encouraged to follow a suggestion and because there seems to be a general agreement to do so, the FCA does not find it necessary to enforce regulation. One example would be that the payday lenders voluntarily participate in data sharing so that most loans are reported in real-time.

Martin Wheatley, chief executive officer of the FCA says:

“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 not pay back their loans on time, the cap on fees and charges represents substantial protection.”

It seems that the FCA has achieved what the OFT (Office of Fair Trading) could not in 2013, and it is certainly refreshing to see simple concise regulations that are fair to all. For a while, it looked like the powers that be were just going to take the easy route and just throw the book at payday.