Payday loan price cap comes into force but unintended consequences may already be starting to show

 
Guy Bentley
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The FCA's payday loan cap takes effect today. (Source: Getty)

The Financial Conduct Authority's (FCA) controversial cap on the cost of payday loans comes into effect today.

The rate of interest and fees charged on payday loans will now be limited to 0.8 per cent per day. The changes are also meant to ensure that if a borrower defaults they will not need to pay back more than double the amount they borrowed. One-off default penalties will be capped at £15.

The FCA claims 70,000 people who were unable to access a payday loan will now be able to do so. According to the City regulator, 1.6m people took out a payday loan in 2013.

The reforms have been welcomed by the backbench Labour MP Stella Creasy, who has campaigned for more regulation of the industry. Several payday lenders have already shut up shop ahead of the price cap's introduction.

Unintended consequences?

While the price cap was intended to make small short-term loans more affordable, research by consumer organisation Which suggests payday lenders have already changed their charges to meet the maximum possible rate.

Over the Christmas period, Wonga and QuickQuid UK were among the lenders charging £24 on a £100 loan over 30 days. The FCA said those who are unable to afford loans at the new rates should avoid the risks of borrowing.

The Consumer Finance Association said the changes would cause fewer loans to be made:

We expect to see fewer people getting loans from fewer lenders and the loans on offer will evolve but will fully comply with the cap. The commercial reality is that the days of the single-payment loan are largely over – payday loans are being replaced by higher-value loans over extended periods.

Many worry the price cap will drive some of the poorest in society into the arms of illegal loan sharks. There is evidence to suggest illegal lending is already on the rise, with the Illegal Money Lending Team for England reporting a 62 per cent increase in 2013-14 for successful prosecutions.

It is estimated 310,000 households are borrowing from illegal lenders. In 2013, the FCA took a rather different position from the one it has now, warning:

Many consumers use payday loans because, despite high APRs, that is the only source of credit available to high-risk borrowers in emergencies. They might be made worse off by caps on APRs or restrictions on how often they can borrow if they reduce availability to some consumers.

However, today's regulations were welcomed by Richard Lloyd, executive director of Which, who said:

The regulator has clearly shown it's prepared to take tough action to stamp out unscrupulous practices, and they must keep the new price cap under close review.

It is now time to turn the spotlight on unfair practices in the wider credit market. We want to see an end to excessive fees that also make it hard to compare different loans, including those charged for unauthorised overdrafts and credit cards.

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