Short-term lending caps must not follow other countries' examples, warns CFA

As the FCA prepares to consult on its proposals for a ground-breaking cap on the cost of high cost, short-term credit, the Consumer Finance Association has warned that lessons must be learned from other countries.

Related topics:  Specialist Lending
Amy Loddington
23rd May 2014
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While we can learn from their own price caps, their caps must not be copied directly if the UK is to avoid far reaching consequences for both lenders and borrowers.

The FCA is due to publish its proposals for the cap in a consultation in June. It will then announce the final rules in November and the cap will come into force on 2nd January 2015.

The cap is in addition to the FCA’s new rules, which only came into force on 1st April 2014. These rules include tougher assessments of borrowers’ applications as well as non-price restrictions including a limit on loan rollovers and the use of continuous payment authority. The rules are already having an impact with fewer loans being granted and major lenders leaving the market. The industry is also awaiting the outcome of a review by the Competition and Markets Authority.

Russell Hamblin-Boone, Chief Executive of the Consumer Finance Association which has today published an infographic which highlights the impact of caps around the globe, says that it is dangerous to set the cap before the full impact of the FCA’s new rules are known.

He commented:

"A copy cap approach can have far reaching consequences. In the UK the implications for businesses and borrowers could be much greater than in other countries. Lenders are facing the prospect of a government price control before the full impact of new regulations is known.  We are already seeing major lenders leave the market and I very much hope that we don't look back and regret that a legal industry that was popular with its customers has been replaced by illegal lenders. This a clear case of 'be careful what you wish for'."

“We are calling for the FCA to structure the cap in such a way that it allows reputable lenders to make a profit on their loans but not to profit from customers that are unable to pay. This is the area of greatest potential harm as borrowers who are already struggling to repay see their debt grow through high fees and charges from disreputable lenders.”

“Whatever the cap, the demand for credit will not go away and borrowers consistently tell us how much they like and value short-term credit. So if the regulator continues to turn the screw and drive reputable lenders out of the market these borrowers will be forced to look for credit elsewhere and with mainstream lenders unwilling to accept the risk this creates a perfect market for illegal lenders.”

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