Payday loan cap should be extended, says Citizens Advice

By Agencies
August 1, 2017

The Financial Conduct Authority (FCA) has published the outcome of its review into high-cost credit, which includes its assessment of the effectiveness of the payday loan price cap.

The review found clear evidence that FCA regulation of high-cost short-term credit (often known as ‘payday lending’) has delivered substantial benefits to consumers. The review found that 760,000 borrowers in this market are saving a total of £150 million per year, firms are much less likely to lend to customers who cannot afford to repay and debt charities are seeing far fewer clients with debt problems linked to high-cost short-term credit. The FCA has therefore decided to leave the existing payday loan price cap in place, and to review it again in 2020. 

However, the review has also established clear concerns with other forms of high-cost credit. In particular, the FCA believes that fundamental changes in the way that unarranged overdrafts are provided may be necessary. Charges for unarranged overdrafts are often high after taking into account the risks to lenders, and can be complex and thus hard for consumers to understand.

The FCA also identified particular concerns in the rent-to-own, home-collected credit and catalogue credit sectors.  While there are similarities between high-cost credit markets and products, there are also significant differences in how they work and how people use them. The FCA is developing tailored solutions to these issues, and will consult on action to address these concerns in Spring 2018.

Andrew Bailey, Chief Executive of the FCA, said, “High-cost credit products remain a key focus for us because of the risks they pose to potentially vulnerable customers.  We are pleased to see clear evidence of improvement in  the payday lending market after a period when firms’ treatment of customers and their business models were often unacceptable. 

“However, there is more that we can do, and this review is about identifying the areas where consumers may be suffering harm so that we can focus our efforts accordingly.

“In particular, the nature and extent of the problems that we have found with unarranged overdrafts mean that maintaining the status quo is not an option.  We are now working to resolve these issues while preserving the parts of the market that consumers find useful.”

Alongside the review, the FCA is publishing proposals to clarify its rules on creditworthiness and affordability. Most credit firms understand the FCA’s rules regarding checks on prospective customers’ creditworthiness, including whether they can afford consumer credit products. However, there is some uncertainty in parts of the market, so the FCA is proposing a number of changes to clarify its expectations.

The FCA has also published more detail on its work on motor finance, setting out the issues that it is considering and the steps it is taking to develop its understanding of the market.  The FCA will publish an update on this work in the first quarter of 2018. 

Citizens Advice Chief Executive Gillian Guy has responded to the review, saying, “The payday loan cap has protected thousands of borrowers from dangerous amounts of debt. Prior to the cap extortionate fees and charges were trapping people into debt – meaning what was supposed to be a short-term loan turned into a long-term nightmare. Since the cap and other new measures were brought in the number of people seeking our help with payday loan debt has more than halved.

“But people are experiencing similar problems when taking out other forms of high cost credit – like doorstep loans, guarantor loans and rent to own services - as well as overdrafts.  It’s good to see the FCA recognise this and the need for action, we think applying a similar cap would help protect consumers – so strongly recommend the FCA considers this as part of its options for other forms of high cost credit.

“A decade on from the financial crisis, it is important to keep in mind the lesson learnt by credit providers and regulators of how ‘loose lending’ overburdens households with unmanageable debt.  The review of credit-worthiness is a good opportunity to assess whether the tests lenders use to check if people can afford to take out credit are still up to the job – and are being used appropriately.  

“All too often people are being able to borrow money which they can’t afford to pay back. The FCA has rightly recognised that firms should fully consider people’s income and outgoings when deciding whether to lend to them. We’d like also the FCA to turn its guidance on affordability checks into rules that lenders must abide by.”

Citizens Advice

* Financial Conduct Authority


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