The UK’s 400 payday lenders could be hit by a new cap on lending due to come into force in January, after an investigation into the controversial payday loan market by the financial regulator.
The Financial Conduct Authority (FCA) said firms will have to cap lending costs at 0.8 per cent per day, with a total interest cap of 100 per cent, so the total amount repaid by a customer is never more than double the initial amount borrowed. Default fees will also be capped at £15.
The FCA added that it will limit repayments on a 30 day loan paid back on time to no more than £24 in fees and charges per £100 borrowed.
It’s estimated the cap will prevent 70,000 people from applying for payday loans, deemed by the FCA to have been in a worse situation if they took out a loan in the first place.
“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.,” said FCA chief Martin Wheatley.
The payday market is dominated by a handful of firms, and the FCA said the introduction of a price cap would likely result in smaller firms disappearing. Addressing concerns this will lead to a less competitive market, the FCA said: .
Some responses argued that a greater number of firms in the market means there is greater competition in the interests of consumers. Our analysis is that for online firms, we do not expect the [new rules]... to reduce competition, given that price competition is already limited. More firms does not necessarily equate to better quality products. The market is already highly concentrated, and the presence of a large number of small firms in the market is not encouraging competition in the interests of consumers.
Our own analysis, as well as that of the Competition and Markets Authority (CMA), is that a small number of firms have a high market share without evidence of smaller firms exerting price pressure on them. While there may be fewer brands to choose from post-cap, we expect that a number of lenders would continue to operate in the market and differentiate their product offering as part of their competitive strategy.
Wonga, QuickQuid and Dollar Financial account for around 70 per cent of the market. The industry also faces further regulation from the CMA, which said in June there was not enough competition between lenders.