High street payday lenders could disappear next year after a new price cap on the industry was set by the Financial Conduct Authority.
From January interest rates will be capped at a daily rate of 0.8 per cent of the amount borrowed, while default fees will be limited to £15.
Meanwhile, the total cost of borrowing will be capped at no more than 100 per cent of the loan, ie twice the amount that was originally borrowed.
The FCA’s chief executive, Martin Wheatley, suggested the caps could reduce the total number of payday lenders to as few as four, while there could be none operating on the high street by the end of 2015.
John Gathergood of the Nottingham School of Economics, pointed out that high street lenders have higher costs. “The capped price is likely to be too low to keep them profitable. It’s therefore possible some well-known names will vanish.”
But the move could open the door to a new wave of overseas firms, warned Richard Scrivener, a regulatory consultant at Bovill. “There is strong evidence to suggest that, with the new price cap established, international subprime lenders will enter the UK market.
“Larger players are already adjusting their business models and the space cleared by the demise of some of the fringe players will create an attractive market.”
The price cap plan has not changed from proposals that the regulator published in July. The FCA said someone taking out a loan for 30 days, and repaying on time, would not pay more than £24 in fees and interest for each £100 borrowed.
“For people who struggle to repay, we believe the new rules will put an end to spiralling payday debts,” Mr Wheatley said. “For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections.”
Debt charities and consumer groups welcomed the move but warned that further controls may be needed. Richard Lloyd, executive director of Which?, said: “The FCA must keep the cap on the cost under review and tighten up further if it doesn’t work as intended.”
Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline, warned that the regulator “will need to be vigilant to ensure that lenders do not simply change their business models to try to evade the rules”.
Matthew Reed, chief executive of the Children’s Society, added: “There must be alternatives to high-cost, short-term credit, including investment in credit unions. The Government should also bring together local welfare assistance schemes and high street banks, to improve access to affordable credit for low income families.”
Russell Hamblin-Boone, of the trade body Consumer Finance Association, warned of “illegal lenders filling the credit gap” created by the changes.
But Martin Lewis of MoneySavingExpert, said: “Payday lenders have manufactured a market that didn’t exist before. They now argue there is a demand to meet, yet much [of that] is a false market driven by targeting impulse spenders with instant cash, without even considering if someone is sober when applying.”Reuse content