Clampdown on payday lenders

The Financial Conduct Authority (FCA) has severely tightened the rules governing payday loans after the industry’s super-high interest rates and large default charges have repeatedly hit the headlines.

The FCA has proposed a cap on prices and fees of 0.8% a day (at present daily rates of 1%-2% are typical) and wants to cap fees for late payment at £15.

The proposals will cost payday lenders £420m a year, or around 42% of their £1bn combined revenues, reckoned the FCA. Meanwhile, payday lender Wonga has hired Andy Haste, previously of RSA Insurance, as its new executive chairman.

What the commentators said

Wonga’s venture capital owners had hoped to sell the group for “a pretty technology-style valuation”, said Nils Pratley in The Guardian. So much for that. The latest blow to Wonga’s reputation was a £2.6m compensation payment to 45,000 customers after it emerged that it had been threatening defaulters in the guise of fictitious law firms.

Still, Haste has made a good start in steadying the ship, reckoned Pratley. For example, he has ditched the TV advertisements featuring puppet old-age pensioners.

But capping rates is a bad idea, as Ryan Bourne of the Institute of Economic Affairs pointed out. Rates are so high, because they compensate lenders for a high risk of default.

Cut them by diktat, and smaller payday lenders will go out of business. This means more people are likely to turn to loan sharks as the market shrinks and competition is reduced.

“The law of unintended consequences,” concluded The Daily Telegraph, “is about to strike again.”

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One Response

  1. 16/08/2014, vicchapman wrote

    Despite a cap on rates which is a step in the right direction they will still be charging .80p per day per £100 borrowed. That’s still a annual interest rate of 292%

    As for the comment about people turning to loans sharks as the market shrinks, there are plenty of other credit companies, home collected loan companies for example, yes rates are still high but with very little effort I found several on the internet, so the FCA could have capped the rate even lower

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