FCA to examine if payday loan cap is fueling loan sharks

LONDON (Reuters) – Britain’s financial watchdog has launched a review to determine whether capped interest rates on payday loans have caused vulnerable consumers to borrow from illegal loan sharks.

Pedestrians walk past a loaner store in North East London on October 3, 2013. REUTERS / Suzanne Plunkett

The introduction of the rate cap in January 2015 responded to concerns among lawmakers and the Church of England about the impact of very high interest rates on people who took out short-term loans to hold them until. pay day.

The cap, which ensures that no one pays more than double the amount borrowed, has resulted in significant improvements for consumers, the Financial Conduct Authority (FCA) said on Tuesday, adding that borrowers were now less likely to be in arrears.

However, the number of loans fell from a rate of 800,000 per month before 2014, when stricter rules were first introduced, to around 300,000 per month in 2015, when the rate cap came into effect. force.

The 2014 rules included tighter oversight, restrictions on how often loans can be renewed, and on the ability of payday lenders to withdraw money directly from customers’ bank accounts.

Instead of taking out payday loans, more and more people are taking on debt with local councils and utility companies or taking out long-term loans, the FCA said.

The review of the cap, the findings of which will be released next summer, is part of a larger review of high-cost credit to see if any changes are needed in the way products are designed, bought or sold.

The definition of the watchdog of high cost credit includes payday loans, home equity loans, catalog credit, some cases of “lease-back” loans for consumer goods, secured loans, and pawnshop. .

Auto financing, credit cards, overdrafts and some installment loans could also be included, the FCA said.

SIDE EFFECTS

FCA chief executive Andrew Bailey said the watchdog needs to be aware of the possible side effects of the restrictions to prevent people from getting ripped off.

“We have to be careful not to create a market that encourages illegal lending,” Bailey said in a blog for MoneySavingExpert.com, a consumer campaign organization.

“Going to illegal money lenders or loan sharks means you are not protected if you find yourself unable to pay. “

Banks have also come under scrutiny after the UK’s Competition and Markets Authority came under heavy criticism from lawmakers for what they saw as a failure to tackle the high fees on non-traded overdrafts.

“The FCA will further examine the findings from a consumer protection as well as a competitive perspective, using all of its powers,” said FCA.

StepChange, a debt charity, said more FCA action is needed to fight the shift from traditional payday lenders to installment loans and praised the watchdog’s recognition that overdrafts can constitute a form of high cost credit.

“The need for caps in other markets has already been accepted, such as payday loans and credit cards,” said Mike O’Connor, CEO of StepChange.

“Overdraft fees suffer continued harm to consumers. Unnecessary delays in action may further harm financially vulnerable consumers. “

Editing by Mark Potter and David Goodman

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