• Wed. Jun 22nd, 2022

Payday loan cap saves £ 150m per year, unplanned overdraft concerns

ByCindy J. Daddario

Mar 9, 2021

A sign in the window of a payday loan store in Dalston on October 3rd, 2013 in London, England.  Payday loan businesses are facing tougher regulations after the steps proposed by the Financial Conduct Authority (FCA) call for more responsible lending.  (Photo of )

The FCA introduced stricter rules for payday lenders in 2014.

Dan Kitwood / Getty Images

LONDON – UK Financial Regulator says crackdown on payday loans will save vulnerable consumers £ 150m in fees annually.

The Financial Conduct Authority (FCA) announced on Monday that a payday loan price cap review, first introduced in 2015, found that 760,000 borrowers are saving a total of £ 150 million a year. The average cost of a high yield short term loan has dropped from over £ 100 to around £ 60. said the FCA.

High-interest, short-term loans – also called “payday loans” because people often took them out to cover shortfalls by payday – boomed in the wake of the 2008 credit crunch.

The Office of Fair Trading, which regulated the industry until 2014, noted that this type of lending caused “hardship” for many borrowers who were burdened with unpayable debts. While the loans were short-term, the interest could be up to 5,000% when calculated annually. Stella Creasy of Labor and the Archbishop of Canterbury were among the public figures who fought against the sector.

The FCA took over regulation of the industry in 2014 and cracked down on the sector. Companies in the industry have since been asked to repay more than £ 300 million in unaffordable loans and fines 1400 lenders have since gone out of business.

The FCA said Monday it found that the cap, which capped daily interest rates at 0.8%, means companies are much less likely to lend to customers who cannot afford to pay back. Charities are also seeing fewer customers with debt problems related to expensive short-term loans.

As a result, the FCA is leaving the price cap and will review the policy again in 2020.

“Major changes” required for overdrafts

While the FCA is happy with its actions in the short-term, high-priced credit market, the regulator now has concerns about other areas of lending – mostly due to unplanned overdrafts.

Labor MP Rachel Reeves pays homage to slain Labor MP Jo Cox on the first day of the Labor Party Conference at the Exhibition Center Liverpool on September 25, 2016 in Liverpool, England.  Party leader Jeremy Corbyn hopes to reunite the party after his re-election yesterday.  (Photo of )

Labor MP Rachel Reeves has called for a cap on unplanned overdraft fees.

Leon Neal / Getty Images

The FCA started a review of unplanned overdrafts last November. Research by consumer group Which? unplanned overdrafts found may be up to eight times as expensive as payday loans and Labor MP Rachel Reeves called for a fee cap.

Bank customers who are overdrafted and have not pre-arranged an overdraft facility can expect fees of up to £ 6 per day with some high street lenders. The Competition and Market Authority (CMA) has determined that Banks make £ 1.2 billion on unplanned overdraft fees.

The FCA says unplanned overdrafts are too complex, meaning those who are forced to access them don’t know the real cost. The supervisory authority says the costs are too high. “Fundamental changes to the provision of unarranged overdrafts may be required,” warns the FCA.

FCA boss Andrew Bailey said in a statement: “The nature and extent of the problems we have seen with unarranged overdrafts make it impossible to maintain the status quo. We are now working to resolve those problems while preserving the parts of the market that are useful to consumers are.”

Lloyds Bank announced earlier this month that it Eliminate unplanned overdraft fees altogether. It is likely to be a preventative measure prior to any expected action by the FCA.

“Cost-intensive loan products remain a focus”

The watchdog is also concerned about: the “rent-to-own” market, where consumers pay rent for an expensive product like a washing machine or television while paying full price; Door-to-door lending; and catalog credit sectors, in which catalog vendors provide credit to buyers of their products.

Bailey said in Monday’s statement: “Because of the risks they pose to potentially vulnerable customers, high-priced credit products remain a key issue for us with customers and their business models have often been unacceptable.

‘There is more we can do, however, and this review is about identifying the areas where consumers could be harmed so that we can direct our efforts accordingly.’

The FCA also examines the motor finance market, which has grown significantly in recent years, to assess whether consumers are at risk.

The Bank of England has raised concerns about it the rise of so-called “PCP” auto financewhere consumers effectively rent cars from manufacturers. Banks are exposed to £ 20 billion credit risk from PCP funding loans. the BoE estimates.

The FCA said: “We believe that direct consumer risk may be more limited but can be increased if affordability has not been adequately assessed and / or the consumer does not clearly understand the contract.”

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