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LONDON – Britain’s financial regulator says a crackdown on payday lending is saving vulnerable consumers £150 million a year in fees.
The Financial Conduct Authority (FCA) said on Monday that a review of its payday loan price cap, first introduced in 2015, found that 760,000 borrowers are saving a total of £150 million per year. The average cost of a high-interest, short-term loan has fallen from over £100 to around £60, the FCA said.
High-interest, short-term loans – dubbed “payday loans” as people often took them out to cover shortfalls until payday – boomed in the wake of the 2008 credit crisis.
The Office of Fair Trading, which regulated the industry until 2014, found that this type of lending caused “hardship and misery” for many borrowers who were saddled with unaffordable debt. While loans were short-term, interest could be up to 5,000% if calculated annually. Labour’s Stella Creasy and the Archbishop of Canterbury were among the public figures who campaigned against the sector.
The FCA took over regulation of the industry in 2014 and cracked down on the sector. Firms in the industry have been ordered to repay more than £300 million in unaffordable lending and fines since then and 1,400 lenders have gone out of business since then.
The FCA said Monday it has found that the cap, which limits daily interest to 0.8%, means firms are much less likely to lend to customers who can’t afford to repay. Debt charities are also seeing fewer clients with debt problems linked to high-cost short-term credit.
As a result, the FCA is leaving the price cap in place and will review the policy again in 2020.
‘Fundamental changes’ needed for overdrafts
While the FCA is happy with its actions in the short-term, high-price lending market, the regulator says it now has concerns about other areas of lending – chiefly with unplanned overdrafts.
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The FCA launched a review of unplanned overdrafts last November. Research by consumer group Which? found unplanned overdrafts can be up to eight times as expensive as payday loans and Labour MP Rachel Reeves has called for a cap on fees.
Bank customers who become overdrawn and haven’t pre-arranged an overdraft can face fees of up to £6 per day at some High Street lenders. The Competition and Markets Authority (CMA) found that banks make £1.2 billion from unplanned overdraft fees.
The FCA says unplanned overdrafts are too complex, meaning those who are forced to access them are unaware of the true cost. The reglator says costs are also too high. “Fundamental changes in the way that unarranged overdrafts are provided may be necessary,” the FCA warns.
FCA CEO Andrew Bailey said in a statement: “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.”
Lloyds Bank announced earlier this month that it was scrapping unplanned overdraft fees altogether. It is likely preemptive move ahead of an expected crackdown by the FCA.
‘High-cost credit products remain a key focus’
The watchdog is also concerned about: the “rent-to-own” market, where consumers pay rent on a big-ticket item such as a washing machine or TV while they are paying off the full price; door-to-door lending; and catalogue credit sectors, where catalogue retailers extend credit to people buying their products.
Bailey said in Monday’s statement: “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.”
The FCA is also looking at the motor finance market, which has grown rapidly in recent years, to assess whether consumers are at risk.
The Bank of England has flagged concerns about the rise of so-called “PCP” car finance arrangments, where consumers effectively rent cars from manufacturers. Banks are exposed to £20 billion of credit risk from PCP finance loans, the BoE estimates.
The FCA said: “We consider that direct consumer risk exposure may be more limited, but may be heightened where there has been an inadequate assessment of affordability and/or a lack of clarity for the consumer in their understanding of the contract.”