The FCA had an opportunity to fix a broken market. It didn't take it.
The FCA had an opportunity to fix a broken market. It didn’t take it
The news with payday lending this morning is, well, that there is no news. Or rather, what we thought was going to be the case with regulation over payday lending going forward has become so.
Put another way, the Financial Conduct Authority (FCA) originally set out their rules for consultation a couple of months ago, the consultation process has taken place, lots of organisations and individuals replied to that, and the outcomes have today come in: nothing changed.
As someone who has been researching the issue for a while now I welcome the work by the FCA, I don’t think it is quite enough. The news that will be talked about today is the volume of lenders who will now leave the market, the risks this will put on people having access to any credit and the fact that a whole industry may have been completely demolished, all but for a few hangers-on.
But lets get one thing straight: markets need regulation, and when markets don’t work for consumers they need tougher regulation and then action. The fact that this is a broken market that, let’s face it, has been given to breaking the rules to the point where each regulator has placed an investigation over the whole industry, means that for tougher regulation they only have themselves to blame.
With no regulation, on price and conduct, borrowers would be left to risk of abuse, and it doesn’t need for me to say that payday lending as an industry is no stranger to abuse.
So the rules that come into place in January 2015: the initial cost cap will be set at a daily rate of 0.8 per cent of the amount borrowed. This is in comparison to the median average of 1.4 per cent per day, which 11 firms already charge. To put that into pounds and pence, someone borrowing £100 for 30 days will not pay more than £24 for it.
A cap will be set at £15 which is a fixed rate of how much a lender can charge in fees if that borrower defaults, and finally a total cost cap will be set at 100 per cent of the total amount borrowed which will apply to all interest, fees, and charges.
Atop that, the total cost cap means that no one will pay back in interest and fees more than 100 per cent of the principle sum they’ve borrowed. In other words, if you take out £100, you won’t pay more than £100 back to pay back the loan.
From no price rules at all, these are big changes. Of course the UK is rather unique in not having rules over price on consumer credit, particularly that of a short-term nature, but in our own recent history this amounts to a significant market outlook.
Though it is not enough. My top line point is that the FCA had an opportunity to fix a broken market that wasn’t budging on price, and instead sees firms compete on the speed and ease at which they lend money, which in turn incentivises irresponsible money lending.
But it didn’t take that opportunity.
Sure, many lenders will go out the market for whom irresponsible lending was a key component of their business model. This is good news. But for the lenders who will maintain their place in the market, they won’t notice much change save for a bigger pool of customers.
The market, from January 2015, will not be completely fixed, only better regulated, and catching up to the standards enjoyed in other countries.
My view is that the the daily rate of 0.8 per cent is still too high. While I welcome that some lenders, whose business models relied on excessive charges, will leave the market, for those lenders still in the market and preparing to take on some of the consumers who were previously otherwise served, there will be no incentive for them to lower their prices.
As the FCA and others have found before, lenders tend not to compete on price, but speed or convenience. In this respect, and predicting this remark on more typical market rules, the market in which payday lending exists is broken, and so therefore it is absolutely right and necessary for regulators to advocate on behalf of a market correcting price cap, that is to say an initial price cap that adequately brings down the price for consumers where the market cannot or has not.
I prefer to do things in pounds and pence; it’s simpler. I’d like to see the cap of £24 per £100 halved to £12. This brings down prices rather considerably to an industry that existed in a broken market. Strict caps in other countries have tended to see the price gravitate towards the price cap (for example you set it £15 per £100, and the majority of firms in that market organise their prices to reflect the cap, they still don’t compete on price and see prices come down).
Because of this the FCA could have made it tighter, if lenders are already dropping out then this risk would have been justified.
At the moment this is a market that thrives on preying on the poor, where the business model has been skewed to the extent where it is more profitable to be irresponsible than responsible. So tougher rules and price caps are welcome. But plenty more is needed.
Carl Packman is a contributing editor to Left Foot Forward and the author of Loansharks: The rise and rise of payday lending
Leave a Reply