Outlook At last some sanity has been brought to the payday loans market.
The Financial Conduct Authority’s belated imposition of a price cap will bring with it a number of benefits. The most obvious is that the industry will no longer have carte blanche to rip people off.
But the cap will also make the sector much less profitable – and that will curtail its ability to market its wares via those grotesque television and radio adverts that have drawn in a small army of customers, many of whom would otherwise have managed without the industry’s services, to the financial benefit of themselves and their families.
Limits on what payday lenders can levy on those who struggle to repay their loans – no one will now end up paying more than twice the sum they were advanced – will also mean that they have to start paying due regard to customers’ ability to afford them. Some companies will simply give up the ghost, and few will mourn their passing.
However, now the principle of capping has been established, why leave it there?
The FCA actually considered applying the measure to other parts of the lending market, such as credit cards, but it held off. That shows a disappointing lack of ambition on the regulator’s part, because it isn’t only lending where such measures could be of great benefit to consumers.
Price competition simply doesn’t exist in many parts of a financial services industry that offers a suite of highly complicated, and often risky, products. Many of those products – pensions and savings, for example – are extremely important, even essential. And yet the market has almost no power to influence their price. Power rests with the provider.
It doesn’t help that the barriers to new entrants in many, if not most, fields are formidable. As a result, the industry is in effect protected from disruptive competitors.
You are unlikely to see anything like an Aldi or a Lidl or even an Amazon emerging to shake up the establishment by offering cheap deals on, say, pensions.
Even when newcomers do dip their toes in the water, they face a struggle because of consumer nervousness about handing cash over to new kids on the block. People often stick with existing providers on the grounds that it’s better the devil you know.
It’s true that the market does occasionally produce corrective mechanisms: the rise of the price-comparison websites; and the launch, several years ago, of discount brokers, which helped savers get around high upfront charges on products such as unit trusts. But these developments are rare.
Changes to some of the industry’s most antediluvian practices have usually required at least some form of political or regulatory intervention (or both).
There was, then, an opportunity here for the FCA to prove its worth and get ahead of the game for once. Sadly, despite all its tough talk, it appears reluctant to step up to the plate.