MSE News: Finally! Government to cap costs of payday loans

And this is the FCA's already stated opinion on caps.

http://www.fca.org.uk/static/documents/consultation-papers/cp13-10.pdf

Alternative options

Price cap on the total cost of credit – The benefits of a total cost of credit cap has been
looked at by the Personal Finance Research Centre at the University of Bristol. This report
highlighted that 17 EU member states have some form of price restriction. Their research was
ambiguous, on the one hand suggesting possible improved lending criteria and risk assessments.
On the other, prices may drift towards a cap, which could lead to prices increasing or lead to
a significant reduction in lenders exercising forbearance.55 Neither of these outcomes latter
would be beneficial for consumers. Clearly this is a very intrusive proposition and to ensure we
fully understand the implications we have committed to undertake further research once we
begin regulating credit firms and therefore have access to regulatory data.

Cap on loan amount – Some American states have taken further steps to address inadequate
affordability assessments by setting caps on the maximum loan amount, either as a total
(e.g. $500) or as a proportion of income (e.g. 25% of income). However, the level of limits
chosen in these states has been criticised by the US consumer group the Centre for Responsible
Lending.56 This is because limits do not take into consideration the borrower’s other obligations
and expenses.

At last - a cap as suggested with a maximum 20% up front fee then 4% a month seems to ensure that you don't pay back more than twice what you borrowed over a 12 month period which seems like a sensible 'maximum' for any consumer credit product.

It needs to be 'fair' to both consumers and different types of lenders though.

1) Bank overdrafts (authorised or unauthorised) need to be similarly capped so if you go overdrawn by £10 for a month the maximum you could be charged would be 24% (20% + 4%) so £2.40 instead of the £1 per day or £30 fee plus interest that is currently applied.

2) The bill also needs to include a recommended penalty charge cap and confirm that irregular charges or penalties for breaching the terms of your account need to reflect the cost as required under contract law. I'd suggest a maximum of £5.

3) The 20% up front fee needs to be capped at £25 maximum and a maximum of say £120 per year with the same lender to prevent someone paying multiple up front fees to the same lender for revolving short term credit.

4) A 'future conduct risk' clause needs to be included so that any other creative charges or fees banks of payday lenders come up with to circumvent these rules are ringfenced while the FCA and courts investigate their legality and compliance with the spirit of legislation. The ringfenced fees would then be refunded in full to customers if found to be simply profiteering or rule avoidance rather than genuinely of value to competition and consumer choice.

John1993 wrote: »

I susppect, if this was introduced, that you'd rapidly see banks simply refusing to allow any payments that resulted in an unauthorised overdraft, followed by accounts being closed.

This may not be popular with the people whose gas bills, loan payments, or council tax were previously being paid through this route.

John,

Accept your point but just trying to be 'fair'. Why should a payday lender be 'capped' but a bank is allowed to charge a lot more for the equivalent loan.

I have no problem with charges for unathorised overdrafts but they have to be proportionate to the cost and risk taken by the bank. Otherwise they are simply used to subsidise other customers.

In the examples you give you are suggesting bills of £100's which would result in much higher fees than my illustrations if the cap was 20% of the unauthorised overdraft amount.

It should never be 'cheaper' for a customer to use a payday loan than their own bank as a result of regulation - which is partly why the payday loan industry has grown so big. If banks charged more realistically, provided a more convenient service then no payday lender would be able to compete.

R.