City watchdog the Financial Conduct Authority (FCA) has announced plans to clamp down on interest rates charged by payday lenders.
The FCA’s proposals are set to come into effect from January 2015, and will ensure that on new and rolled-over payday loans, interest plus fees will not exceed 0.8% per day of the amount borrowed.
In addition, fixed fees on payment defaults will be capped at £15, in an attempt to protect borrowers who are struggling to repay. Interest on unpaid balances and default fees must not exceed 0.8% per day of the outstanding amount under the FCA’s new rules.
In an end to eye-popping annual percentage rates of 5,000% charged by some payday lenders, the FCA says borrowers must never be in a position where the amount they pay back in fees and interest is greater than the sum borrowed.
According to the FCA’s research, most short-term cash lenders are generating revenue of between 1% and 2% per day from borrowers. The watchdog’s numbers estimate firms will lose around £420mln in revenue per year as a result of these changes, which equates to around 42% of annual revenues.
From the borrower’s perspective, consumers will save on average £193 per year when the new rules come in compared to the existing laissez-faire market, translating into £250mln of aggregate annual savings.
From December 2014 payday lenders will need to apply to become fully authorised by the FCA. The FCA will carefully assess their business models and management structure to ensure they are treating consumers fairly and following the new rules; particular attention will be paid to whether or not firms are trying to avoid the price cap. Firms that do not meet the required standard will not be allowed to carry on offering payday loans.
The FCA said it also expects to see evidence of a significant increase in payday lending firms participating in real-time data sharing by November, and better coverage by real-time databases.
“If we do not see the level of progress we require, we will consult on the introduction of data-sharing requirements,” the FCA said.
Martin Wheatley, the FCA’s chief executive officer, called the new regulations “a giant leap forward”.
"There have been many strong and competing views to take into account, but I am confident we have found the right balance,” Wheatley said.
The new rules represent a triumph for Walthamstow MP Stella Creasey, and her campaign against what she terms “legal loan sharks”.
Creasey has been a strong advocate of alternative forms of credit, such as credit unions and social finance.
“We need a complete overhaul of consumer credit in this country so that we halt the spiral of debt so many find themselves caught in as a result of borrowing in this way,” Creasey said last month.
The new rules are unlikely to affect reputable “doorstep lenders”. Broker RBC, for instance, reckons that Provident Financial’s (LON:PFG) charges already fall within the new FCA cap, but it did concede that headlines surrounding this story “could result in negative sentiment around Provident”.
Shares in Provident were down 2.2% at 2,118p in a rising market in mid-morning trade.
The new rules will provide an additional challenge to Andy Haste, the former boss of insurer RSA, who has taken over as chairman of Wonga, one of the most high profile payday lenders.
On Monday, Haste announced a series of measures aimed at reducing the perceived toxic nature of the Wonga brand, and Haste admitted these measures would put a dent in its £60mln annual profits.
“We need to repair our reputation and regain our right to be an accepted part of the financial services sector,” Haste admitted.