FCA proposes payday loans cap of 0.8% per day

payday loan shop The payday loan industry is likely to shrink by 42% as a result of the changes

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Plans for a cap on the amount that payday lenders can charge their customers have been announced by the City regulator.

Payday loan rates should be capped at 0.8% a day of the amount borrowed, said the Financial Conduct Authority (FCA).

And in total, no one will have to pay back more than twice what they borrowed.

The payday industry said the changes - due in January 2015 - would mean more people turning to loan sharks.

There will also be a cap on default charges, which is likely to be set at £15.

"For the many people that struggle to repay their payday loans every year, this is a giant leap forward," said FCA chief executive Martin Wheatley.

The FCA estimates that payday lenders will lose £420m a year as a result of the changes, or 42% of their revenue.

But it says consumers will save an average of £193 each a year.

Start Quote

The evidence from other countries is that people either turn to illegal lenders - the back-street loan sharks - or more likely, they'll go to online lenders who are operating outside of the UK”

End Quote Russell Hamblin-Boone Consumer Finance Association
'Loan sharks'

The measures announced include:

  • Initial cap of 0.8% a day in interest charges. Someone who takes out a loan of £100 over 30 days, and pays back on time, will therefore pay no more than £24 in interest
  • Default fees capped at £15. Borrowers who fail to pay back on time can be charged a maximum of £15, plus 0.8% a day in outstanding interest
  • Total cost cap of 100%. Even if a borrower defaults, he or she will never have to pay back more than twice the amount they borrowed.

They mean that many lenders will have to cut their rates.

FCA chief Martin Wheatley: Many payday loans companies will go out of business

Wonga currently charges £37.15 to borrow £100 for a month, while The Money Shop charges £29.99.

Both would have to cut these fees to £24.

The FCA looked at other countries which operate a loan cap - such as Australia, which has a rate limit of 4% a month, with a maximum up-front fee of 20%.

But the industry has warned that the Australian experience has not been good.

"The evidence from other countries is that people either turn to illegal lenders - the back-street loan sharks - or more likely, they'll go to online lenders who are operating outside of the UK," said Russell Hamblin-Boone of the Consumer Finance Association (CFA).

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Analysis: Kamal Ahmed, BBC Business Editor

Buried in the consultation document on the new payday loans cap is an intriguing detail. The FCA considered whether to extend the cap to other forms of high cost credit but decided against - at this stage. It is undertaking a review of the credit card market, looking at "potential harm", and is also investigating personal bank accounts and overdrafts (where charges on unauthorised overdrafts can be very high). Expect more action on charges in the autumn.

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The FCA admitted that it now expects the payday loan industry to become smaller, with some customers no longer able to get the loans they did previously.

But it said that, apart from an initial short-term period, they would be better off without the loans, and the previously "excessive" charges.

StepChange Debt Charity said the move was a step forward, but was not a "silver bullet".

It wants payday lenders to be forced to share information, so they can see what other loans a potential borrower already has.

Since 1 July, payday lenders have already been subject to new rules, including a limit on roll-overs, more affordability checks, and controls on Continuous Payment Authorities (CPAs), which allow lenders to take money from people's bank accounts.

Those changes have already led to far fewer loans being made.

The FCA will now consult on the changes, which were first ordered by Chancellor George Osborne last November.

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