Cap on costs of payday loans
A cap on the fees and interest charged by payday lending firms is to be introduced in a bid to protect borrowers from escalating debts.
The proposals, which include default fees capped at £15 and a limit of 0.8% per day on interest on unpaid balances, should mean those who cannot repay on time will never have to pay back more in charges than the amount borrowed.
The latest clampdown on the industry by the Financial Conduct Authority is due to come into force in January, subject to a consultation period.
The watchdog is also planning a price cap on new loans - including those rolled over - under which interest and charges must not top 0.8% per day of the amount borrowed.
That means those who borrow £100 for 30 days and pay back on time will not pay more than £24 in fees and charges and someone taking the same loan for 14 days will pay no more than £11.20.
The FCA estimates that consumers will save on average £193 per year through the measures, translating into £250 million annual savings overall. The price cap is set to cost the industry about £420 million in lost revenues.
The moves have been welcomed by consumer groups, although the industry is concerned that the crackdown will limit choice for borrowers who will be forced to turn to loan sharks or lenders operating outside the UK.
The £2.8 billion sector has come under intense scrutiny amid outrage over the way that some consumers have been treated. Many of the problems found by regulators have revolved around people taking on payday debt they cannot afford, meaning the loan is then rolled over and the original cost balloons.
Charity StepChange recently said it received nearly 14,000 cries for help last year from people who were struggling with five payday loans or more.
FCA chief executive Martin Wheatley said: "There have been many strong and competing views to take into account, but I am confident we have found the right balance.
"Alongside our other new rules for payday firms - affordability tests and limits on rollovers and continuous payment authorities - the cap will help drive up standards in a sector that badly needs to improve how it treats its customers."
Last year, 1.6 million consumers took out 10 million loans, with a total value of £2.5 billion. The average loan has a principal of around £260 lent over an initial duration of 30 days. The average number of payday loans taken out by a customer last year was six.
Payday lenders are already prevented from r olling over loans more than twice and have been restricted in their ability to drain money from bank accounts. From July 1, firms operating in the industry have also had to place risk warnings on television adverts.
Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents the industry, said: " Anyone who thinks that a price cap is good news for borrowers should have a thought for those many people who will be turned down for loans because the best lenders will have to reject those with the worst credit records.
"We support a cap that allows the industry to operate profitably with the right protection in place for vulnerable people. With new regulations and tighter affordability checks, critics must now face up to the fact that most people use, need and like short-term credit and the measures in place are more stringent than for any other form of consumer credit."
Stella Creasy, Labour's minister for Competition and Consumers Affairs, said the new rules were a step in the right direction but did not go far enough.
She said the cap worked out at only one pound less than the companies are currently charging, while the t otal cost cap of 100% of the borrowed amount will leave British consumers less well protected than their counterparts in Japan and most of Canada and the United States.
Ms Creasy said: "FCA must commit to continually reviewing and reducing this cap and as well as ensuring it covers the whole of the industry to make sure none of these legal loan sharks slip through their net."