FCA announce payday loan charge cap

Following proposals in July, the FCA have decided to introduce a new price cap structure, meaning that customers taking out a loan on or after 2 January will never need to pay back more than twice what they borrowed. In addition, someone taking out a typical loan over 30 days and repaying on time will not pay more than £24 per £100 borrowed. Fixed default fees have also been capped at £15.

The FCA began regulating high-cost short-term credit on 1 April 2014, aiming to tackle poor conduct in the market. They also made new rules on affordability, advertising, rollovers and the use of continuous payment authorities in February 2014.

The price cap will come into effect on 2 January 2015 and will be reviewed two years after implementation, in the first half of 2017. In the meantime the FCA plans to monitor whether there are any unintended consequences emerging for firms or consumers, including the impact on people who are no longer able to get this type of credit.

FCA chief executive Martin Wheatley said:

"For people who struggle to repay, we believe the new rules will put an end to spiralling payday debts."

"For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections."

Speaking on BBC Radio Four's Today programme, Russell Hamblin-Boone, chief executive of the Consumer Finance Association said:

"We've restricted, for example, extending loans, rolling over loans, [and] we've got tighter checks on people before we approve loans."

"This [cap], if you like, is the cherry on a rather heavily-iced cake."

"We'll inevitably see fewer people getting fewer loans from fewer lenders. The fact is, the demand is not going to go away. What we need to do is make sure we have an alternative, and that we're catching people, and that they're not going to illegal lenders."

Gillian Guy, Chief Executive of national charity Citizens Advice said:

“This cap means payday lenders can no longer force borrowers into an endless spiral of debt. This is a real improvement. People have sought help from Citizens Advice after their payday loan of £300 ballooned to over £2,500 worth of debt. The cap will help to stop these serious cases in which sky high interest and extortionate fees turn a small loan into an unmanageable debt.

“This is a step towards fixing a market that hasn't been working for consumers. Payday loan firms should only lend to people who they know can afford to pay back the debt, and must point those who can’t towards free debt advice.

“People who are in a position to borrow need a responsible short-term credit market. A vital part of this is greater choice. High street banks should seize the opportunity to meet demand and offer their customers a better alternative to payday loans.

“The FCA should monitor the cap, including whether it is set at the right level, to make sure it is working for consumers. They must also keep a close eye on whether lenders are sticking to the rules. Problems with high cost credit go well beyond payday loans. We’re concerned about the serious problems people are reporting with products like logbook and guarantor loans.  As the new rules force payday lenders to treat customers more fairly, these other areas must be given more attention."