The Financial Conduct Authority (FCA), who are responsible for regulating the high-cost short term lending market, have completed their review of high-cost credit, which includes the payday loans market. Today, they confirmed the regulation of payday lending has delivered substantial benefits to consumers. This includes the introduction of the price cap which came into effect in January 2015 and means that the rates charged by payday lenders do not exceed 0.8% per day, equal to or less than £24 per £100 loaned over 30 days.
The FCA review said that since January 2015, no one has paid more than 0.8% per day of the amount borrowed or no more than twice the amount that borrowed. This has resulted in around 760,000 borrowers saving a total of £150 million per year and companies were now stricter and less likely to lend to those who cannot afford to repay. The price cap will remain in place until at least 2020. Furthermore, debt charities reported seeing fewer people struggling to repay payday loans, suggesting that problems are being addressed earlier. (Source: BBC News)
Other sectors under the spotlight
The FCA has raised concerns over other high-cost consumer credit products including rent-to-own, home-collected credit and credit on goods bought from catalogues. The rent-to-own market involves renting home appliances and goods such as washing machines, dishwashers and TVs.
However, the cost of renting these goods can sometimes be three times the cost of buying it if calculated over a year. Some experts have argued that these goods should be available from housing associations. The industries will be investigated further with proposed solutions being published in early 2018.
For motor finance, there needs to be greater scrutiny over the affordability tests carried out and the transparency of terms, something that will require further investigation by the FCA.
Bank overdrafts under investigation
The FCA have put the most pressure on banks and the cost of unplanned bank overdrafts being more expensive than payday loans. Some banks charge around £6 per day, or up to £90 per month for going into the red.
Which reports that for an individual using a payday loan to borrow £100 over 30 days, an unplanned overdraft can cost £156 more, depending on the provider.
The FCA has highlighted four main issues with unplanned bank overdrafts:
- Lack to transparency – The fees charged are complex and customers struggle to understand how they work.
- High charges – the fees charged are exorbitant and higher than most other consumer credit products.
- Repeated use – many customers use unplanned overdrafts month-after-month and this is creating a cycle of debt.
- Distribution of charges – the worse off in society are paying disproportionately more to use their current accounts. The figures state that 85-90% of unarranged charges are paid by 10-15% of consumers and less than 5% of consumers account for 60% of charges.
Remedies to overcome high bank overdraft charges
The banks have improved their communication of overdraft charges by sending text messages to customers when they reach their limits and the charges start to accrue.
However, banks have taken further measures to reduce charges and increase transparency in the following ways:
- Lloyds Banking Group has decided to scrap unplanned overdraft fees altogether from November 2017
- RBS Group caps unplanned overdraft fees at £80 per month
- TSB has capped fees at £80 per month
- HSBC caps fees at £80 per month and promises to never be more that the amount you’ve borrowed
- Santander has always had a monthly cap of £95
- Barclays does not charge unplanned overdraft fees, but caps returned item fees at £32.
Other remedies being debated include putting a price cap on unauthorized bank overdrafts or replacing charges with a one-off fee. The solutions will be discussed by the FCA and made clearer in an update in the Spring of 2018.