LONDON: Britain’s financial watchdog set out new rules yesterday to cap sky-high interest rates offered by so-called payday lenders, bringing down the cost of short-term loans criticised for causing hardship and misery among borrowers.
Payday lenders, who offer to tide borrowers over until their next payday, have been accused of charging exorbitant fees and tipping households into a spiral of debt. Britain’s biggest short-term lender Wonga charges an annual interest rate of 5,853 percent, according to its website.
The Financial Conduct Authority (FCA) said that from January 2015 the interest and fees on new payday loans must not exceed 0.8 percent per day of the amount borrowed. Fixed default fees cannot exceed £15 ($25.52) and the overall cost of a loan must not exceed the amount borrowed.
Consumer group Which?, which has accused payday lenders of exploiting borrowers and tipping them into a spiral of debt, welcomed the government’s move.
“It’s good to see the regulator tackling the eye-watering cost of payday loans, especially the excessive default charges that sting struggling borrowers and lead them into spiralling debt,” said Which? Executive Director Richard Lloyd.
Lloyd called for the cap on the cost of loans to be kept under review and tightened up further if it doesn’t work as intended.
The Citizens Advice Bureau (CAB), a charity that helps people with legal and financial issues, said borrowers needed more choice in short-term lending and called on banks to offer alternatives. Payday lenders have grown since the 2008 financial crisis, after which banks were less willing to offer temporary overdrafts.
“Not only is the clean-up of the existing market essential (but) banks need to step up to the plate to offer a responsible micro-loan,” said CAB Chief Executive Gillian Guy. Capping payday loan rates will be one of the FCA’s first acts after it took on supervision of about 50,000 consumer credit firms in April. Of those, around 200 offer short-term payday loans — a market worth about £2.8bn annually.
“For the many people that struggle to repay their payday loans every year this is a giant leap forward.”, said Martin Wheatley, the FCA’s chief executive officer. “For those who struggle with their repayments, we are ensuring that someone borrowing 100 pounds will never pay back more than 200 pounds in any circumstance.”
The regulator estimated consumers will save on average £193 per year, or £250m ($425.4m) of annual savings in aggregate once the new regulation is in place.
Lenders will lose about 42 percent of their revenue, or 420 million pounds per year as a result of the cap, the FCA said. Reuters
