Will the FCA’s cap on payday lender charges lead to an upsurge in the use of loan sharks?

Some fear that borrowers will be driven from Wonga to loan sharks

John Lamidey, senior partner at Arminius Associates and former chief executive of the Consumer Finance Association, says Yes.

There has already been a significant increase in community illegal lending. The Illegal Money Lending Team for England saw a 62 per cent rise in 2013-14 for successful prosecutions.

An estimated 310,000 households are borrowing from illegal lenders. At a conservative estimate, one in four people who used payday loans will no longer be able to access the level of credit they need. And anyone who has a record showing missed payments for any type of credit will find it difficult to borrow again from any lender.

The need for credit is not going to evaporate. The real threat is that the reduction in access to credit from regulated lenders in the UK opens up a substantial opportunity for unregulated online lending, based in locations beyond the reach of the Financial Conduct Authority (FCA). Regulators seem to forget that we live in an online global marketplace.

Rebecca Thorpe, head of projects at Bovill, says No.

Customers with the poorest credit history will be denied access to loans they would previously have received, but this isn’t just down to the price cap. More rigorous affordability checks may have already contributed to a drop in lending volumes, and there’s no evidence the illegal sector is benefitting as a result. The FCA suggests that only a small minority of those denied a loan will go to loan sharks.

While this is clearly not the best outcome for those customers, it is outweighed by the benefit to the hundreds of thousands of consumers who will get a cheaper loan and a much reduced likelihood of seeing their debt spiral out of control. There is also strong evidence to suggest that, with the new price cap established, international subprime lenders will enter the UK sector.

Larger players are already adjusting their business models, and the space cleared by the demise of some of the fringe players will create an attractive market.

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