Costs cap to aid payday borrowers
Payday loan customers will see the fees and interest they pay capped from today amid moves to stop such debts spiralling out of control.
The new rules mean that people using payday lenders and other short-term credit providers will generally see the cost of their borrowing fall and those who cannot afford to repay their debt on time will never pay back more in charges than the sum they initially wanted to borrow.
For all high-cost short-term credit loans, interest and fees must not exceed 0.8% per day of the amount borrowed.
The Financial Conduct Authority (FCA), which oversees the industry, said the move will lower costs for most borrowers and ensure that charges are proportionate to the size and duration of the loan.
Default fees for borrowers who fail to repay on time will be capped at £15 under the measures, which are the latest in a string of clampdowns on the sector.
The new rules mean that, for example, if someone borrows £100 for 30 days and pays back on time, they will not be charged more than £24.
Someone who borrows £100 but struggles to repay their debt will never pay back more than £200, including fees and charges.
Short-term lenders said the caps will lead to fewer people getting loans from a smaller group of lenders. They said that initially at least, the cost of a payday loan will generally be at or near the cap.
Wonga, Britain's biggest payday lender with more than one million active customers, started capping the cost of its loans in mid-December in order to comply with the rules.
Stricter rules for credit brokers are also being applied from today. Concerns have been raised that consumers have often mistaken credit brokers for lenders.
Royal Bank of Scotland (RBS) recently highlighted a case involving someone looking for a £100 loan who ended up being charged £700 because their details were passed to 10 different middlemen firms.
The FCA has previously seen evidence of fees being taken by credit brokers without informed consent and under hidden or misleading terms and conditions.
Under the new rules, a firm will not be able to request a consumer's bank details or take a payment without their explicit consent first.
Brokers are now required to state their role prominently in all advertising and c onsumers will have a 14-day right of cancellation where credit broking agreements are entered into as distance contracts, for example online.
Martin Wheatley, chief executive of the FCA, said the payday loan cap will "make the cost of a loan cheaper for most consumers.
"Anyone who gets into difficulty and is unable to pay back on time, will not see the interest and fees on their loan spiral out of control - no consumer will ever owe more than double the original loan amount."
Consumer group Which? said its research suggests that in 2014, an average of 880,000 households took out a payday loan each month.
It has been running a "clear up credit" campaign and said the regulator should now look to make it easier for people to compare the cost of different types of debt, including unauthorised overdrafts and credit cards.
Which? executive director, Richard Lloyd, said: " Today's crackdown on the payday lending market comes not a moment too soon. Lenders must now start competing on price and treating their customers fairly.
"The regulator has clearly shown it's prepared to take tough action to stamp out unscrupulous practices, and they must keep the new price cap under close review. It's now time to turn the spotlight on unfair practices in the wider credit market.
"We want to see an end to excessive fees that also make it hard to compare different loans, including those charged for unauthorised overdrafts and credit cards."
The payday loans industry, which has seen a storm of criticism in recent years , has undergone a string of shake-ups after coming under the regulation of the FCA last April.
Fears were raised by the FCA's predecessor body, the Office of Fair Trading, that some payday firms appeared to base their business models around people who could not afford to pay back their loans on time, meaning the cost of the debt ballooned as they were forced to roll it over and extra fees and charges were piled on.
After coming under the FCA's supervision, payday lenders were banned from rolling over a loan more than twice and and they can only now make two unsuccessful attempts to claw money back out of a borrowers' account.
Payday firms have only ''interim permission'' to operate under the FCA's toughened regime and they will need to pass assessments in order to get full permission to carry on.
Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents short-term lenders including the Money Shop, Quick Quid, Peachy and Sunny, said: " This is the start of a new era for short-term lenders who are operating in an entirely new lending landscape under the FCA.
"We expect to see fewer people getting loans from fewer lenders and the loans on offer will evolve but will fully comply with the cap.
"The commercial reality is that the days of the single-payment loan are largely over - payday loans are being replaced by higher value loans over extended periods.
"Initially, prices of loans will be at or near the cap. In time we may see risk-based pricing, but innovation could be stifled by the threat of the regulator as lenders seek FCA authorisation."