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FCA proposes payday loans cap of 0.8% per day FCA proposes payday loans cap of 0.8% per day
(about 1 hour later)
Plans for a cap on the amount that payday lenders can charge their customers have been announced by the City regulator.Plans for a cap on the amount that payday lenders can charge their customers have been announced by the City regulator.
Payday loan rates should be capped at 0.8% a day of the amount borrowed, said the Financial Conduct Authority (FCA).Payday loan rates should be capped at 0.8% a day of the amount borrowed, said the Financial Conduct Authority (FCA).
And in total, no one will have to pay back more than twice what they borrowed.And in total, no one will have to pay back more than twice what they borrowed.
The payday industry said the changes - due in January 2015 - would mean more people turning to loan sharks.The payday industry said the changes - due in January 2015 - would mean more people turning to loan sharks.
There will also be a cap on default charges, which is likely to be set at £15.There will also be a cap on default charges, which is likely to be set at £15.
"For the many people that struggle to repay their payday loans every year, this is a giant leap forward," said FCA chief executive Martin Wheatley."For the many people that struggle to repay their payday loans every year, this is a giant leap forward," said FCA chief executive Martin Wheatley.
The FCA estimates that payday lenders will lose £420m a year as a result of the changes, or 42% of their revenue.The FCA estimates that payday lenders will lose £420m a year as a result of the changes, or 42% of their revenue.
But it says consumers will save an average of £193 each a year.But it says consumers will save an average of £193 each a year.
'Loan sharks''Loan sharks'
The measures announced include:The measures announced include:
They mean that many lenders will have to cut their rates.
Wonga currently charges £37.15 to borrow £100 for a month, while The Money Shop charges £29.99.
Both would have to cut these fees to £24.
The FCA looked at other countries which operate a loan cap - such as Australia, which has a rate limit of 4% a month, with a maximum up-front fee of 20%.The FCA looked at other countries which operate a loan cap - such as Australia, which has a rate limit of 4% a month, with a maximum up-front fee of 20%.
But the industry has warned that the Australian experience has not been good.But the industry has warned that the Australian experience has not been good.
"The evidence from other countries is that people either turn to illegal lenders - the back-street loan sharks - or more likely, they'll go to online lenders who are operating outside of the UK," said Russell Hamblin-Boone of the Consumer Finance Association (CFA)."The evidence from other countries is that people either turn to illegal lenders - the back-street loan sharks - or more likely, they'll go to online lenders who are operating outside of the UK," said Russell Hamblin-Boone of the Consumer Finance Association (CFA).
Analysis: Kamal Ahmed, BBC Business EditorAnalysis: Kamal Ahmed, BBC Business Editor
Buried in the consultation document on the new payday loans cap is an intriguing detail. The FCA considered whether to extend the cap to other forms of high cost credit but decided against - at this stage. It is undertaking a review of the credit card market, looking at "potential harm", and is also investigating personal bank accounts and overdrafts (where charges on unauthorised overdrafts can be very high). Expect more action on charges in the autumn.Buried in the consultation document on the new payday loans cap is an intriguing detail. The FCA considered whether to extend the cap to other forms of high cost credit but decided against - at this stage. It is undertaking a review of the credit card market, looking at "potential harm", and is also investigating personal bank accounts and overdrafts (where charges on unauthorised overdrafts can be very high). Expect more action on charges in the autumn.
The FCA admitted that it now expects the payday loan industry to become smaller, with some customers no longer able to get the loans they did previously.The FCA admitted that it now expects the payday loan industry to become smaller, with some customers no longer able to get the loans they did previously.
But it said that, apart from an initial short-term period, they would be better off without the loans, and the previously "excessive" charges.But it said that, apart from an initial short-term period, they would be better off without the loans, and the previously "excessive" charges.
StepChange Debt Charity said the move was a step forward, but was not a "silver bullet".StepChange Debt Charity said the move was a step forward, but was not a "silver bullet".
It wants payday lenders to be forced to share information, so they can see what other loans a potential borrower already has.It wants payday lenders to be forced to share information, so they can see what other loans a potential borrower already has.
Since 1 July, payday lenders have already been subject to new rules, including a limit on roll-overs, more affordability checks, and controls on Continuous Payment Authorities (CPAs), which allow lenders to take money from people's bank accounts.Since 1 July, payday lenders have already been subject to new rules, including a limit on roll-overs, more affordability checks, and controls on Continuous Payment Authorities (CPAs), which allow lenders to take money from people's bank accounts.
Those changes have already led to far fewer loans being made.Those changes have already led to far fewer loans being made.
The FCA will now consult on the changes, which were first ordered by Chancellor George Osborne last November.The FCA will now consult on the changes, which were first ordered by Chancellor George Osborne last November.
Have you taken a pay day loan? What's your reaction to the cap? You can email haveyoursay@bbc.co.uk using the subject line 'Pay Day Loans'.Have you taken a pay day loan? What's your reaction to the cap? You can email haveyoursay@bbc.co.uk using the subject line 'Pay Day Loans'.