CAPPING interest rates on payday loans could harm borrowers by reducing access to credit at times of need, the City watchdog warned yesterday.
After a campaign from MPs the new Financial Conduct Authority (FCA) is set to get powers to limit interest rates on the risky loans.
Politicians in favour of the cap have argued the rates are dangerously high and hurt the most vulnerable borrowers. When the short term loans are put in annualised terms, rates can come in at over 4000 annual percentage rate (APR).
But the FCA fears this misunderstands how payday loans are used, and may cause more harm than good.
“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,” the FCA said in a report. “Usury laws and similar provisions have been cited as examples of regulatory failure driven by regulators’ own behavioural biases.”
The warning came as part of a wider report setting out the FCA’s plans to work out why consumers sometimes make bad financial decisions.
For example it fears consumers are often tempted by initial low interest rates on credit cards, failing to consider higher rates further down the line.
It has the power to ban products, require extra information to be given, or to include cooling-off periods.
“Buyer beware becomes hard to defend when unsophisticated customers are buying seriously complicated financial products, where the risk of failure is far more dangerous than a decision in the supermarket to buy three bananas instead of one,” said FCA head Martin Wheatley.