FCA to carry out review on high-cost lending products
The Financial Conduct Authority announced today that it will be doing a review of high-cost short term lending products in the UK, with a specific focus on payday loans. The review, which will likely take place in the first quarter of 2017, comes exactly two years since the introduction of a price cap which was introduced by the FCA in January 2015, directly after taking over from the Office of Fair Trading.
What did the initial price cap include?
The main aspects of the FCA price cap included:
- Daily interest rate capped at 0.8% per day
- An individual will never pay double what they have borrowed
- A maximum charge of £124 per £100 borrowed
- Restriction on number of rollovers for a loan
- Limit to two attempts per day to collect from a customers account using Continuous Payment Authority
What is the outcome of the tougher regulation?
The consequences of this enforcement led to significant changes for the payday industry. Notably, several lenders were forced to exit as profit margins became tighter and it was simply unprofitable to continue trading. There are currently around 50 lenders in the sector where this number might have been five-fold around 3 years ago. This means that the remaining lenders have demonstrated a commitment to responsible lending and a longevity which allows them to trade successfully. Nevertheless, the average number of loans funded per month decreased from 800,000 to 300,000 in 2015 (Source: Daily Mail). This suggests that the margins are not there to fund the same volumes and also the lending criteria is now much stricter than it used to be.
Whilst having an industry consisting of responsible lenders is welcomed and thereby an increase in consumer confidence, what about these 500,000 people per month that used to get loans to tide them over? The FCA said that rather than payday products, there is a population that are getting into debt with local councils and utility companies or taking out longer-term instalment loans.
What is the review hoping to achieve?
Ultimately, the review wants to check that borrowers are better off. If there is a group of consumers that now cannot access the loans they need, they may be vulnerable to illegal loan sharks where they have no protection from any organisations or governing bodies. See the quote below:
Finding the balance between depowering payday loans and not encouraging loan sharks is a tough position. Other questions include whether the cap needs to be brought down even further. This can be seen as a way of further cleaning up the controversial industry, allowing only the very best to remain and supports initial plans by the FCA to only have 3 or 4 lenders operating in the industry (proposed in 2014).
Other industries under review
As part of the process, the FCA will also review the rates and practicies of other high cost short term lending, notably:
Rent to own: This is where people lease household products for a weekly or monthly rate with the option to buy the product after a certain time. However, this has also been criticised by the regulators and press as preying on the most vulnerable in society. In an example from The FT, the cheapest washing machine available from Brighthouse, the largest supplier of rent-to-own appliances in the UK, would cost the customer £1,056 including all weekly repayments and insurance – however purchasing the same model on the high street would only cost £349.97 including delivery and payments broken down too.
Unauthorised overdrafts: For those using credit cards and decide to use their overdraft without permission, they can potentially borrow a few hundred pounds but at great cost. The reason is because the credit card provider has not given you any permission to go into this overdraft and so there is a huge risk that they will lose their money. When we say expensive, we mean expensive, where banks’ rates range from £52 to £100 for simply borrowing £100.
Historically, people would not be notified that their account was going into their overdraft but recent changes have allowed customers to receive text messages as soon as this happens, and ultimately this has led to millions of pounds in savings for UK consumers.
Doorstep lending: This is the door-to-door service whereby a lender can provide a customer the money they need by visiting their home and then visit back each week to take a repayment. The industry is dominated by Provident who charge a Representative APR of 535%, quite similar to payday lenders. A spokesman told The FT that the costly rates are to cover the high default rates in the industry of around 15-20% and also the staff intensive nature of the business to send employees to thousands of locations every week.
Guarantor products: Loans with a guarantor, like the ones featured on our website are also under the category of high cost lending and will also be reviewed by the FCA. However, with complaints at a record low (only 530 during a 3-year period of 2012 to 2015) and a small number of key players in the industry, it is a well regulated sector and is perhaps one that the FCA would like to mirror in the payday sphere.
Logbook Loans: A way to borrow up to £50,000 whilst releasing the equity from your car, bike or van, it is another industry that the FCA governs. There is an interest to protect consumers since the lowest rates start at 99.9% Representative APR and customers risk losing their vehicle if they cannot keep up with repayments.
For more information about FCA regulation in short term lending, the cost of financial products and level of complaints, we encourage you to read our blog section where we cover these topics on a weekly basis.