FCA consults on a price cap for High Cost Short Term lending
The FCA has published its Consultation Paper on a total price cap for High Cost Short Term credit (HCSTC) and is seeking responses to their consultation questions by 1 September 2014.
They plan to publish their final rules in early November, allowing firms to prepare for the introduction of the price cap, which must be implemented by 2 January 2015.
Initial Cost Cap set at 0.8% per day
For new loans interest fees must not exceed 0.8% of the amount borrowed, including if they are rolled over. This proposal is:
1. Aimed at lowering prices for borrowers who pay back their loans on time
2. Calculated as a daily rate, so that the cost of the loan proportionately applies to its length
aimed to ensure consumers will only pay higher prices if they borrow more.
Default Charges to be capped at £15
Whilst recognising that firms incur cost when a borrower fails to repay on time, to protect those struggling to meet repayments, the FCA proposes a £15 cap on any costs charged. Interest on unpaid balances and default fees must not exceed 0.8% per day of the outstanding amount. The aim is:
1. To ensure that firms properly assess affordability before lending
2. To ensure that charges where applied, are not excessive
3. To ensure that firms are treating borrowers in default or arrears difficulties, with forbearance and due consideration.
Total Cost Cap will be set at 100%
Borrowers must never have to pay back more in fees and interest than the amount borrowed. The aim is:-
1.To protect borrowers from escalating debts
2. To allowing firms to continue offering loans for different lengths of time.
HCSTC firms applying for full FCA authorisation from October this year will need to demonstrate compliance with the cap.
Research base for the proposals
In putting together the proposals, the FCA considered:
1. Loan-levels models of eight firms covering 16 million loans over two years
2. The credit records of 4.6 million individuals
3. 2,000 telephone interviews to understand the impact on consumers
4. A survey of over 100 firms.
Based on the above research, the FCA believes that the cap is proportionate and will benefit consumers. The findings indicate:
1.Consumers will save, on average £193 per year, translating into £250 million in annual savings
2.Firms will lose £420 million in revenue per year (approximately 42%)
3.11% of people who have previously taken out High-Cost Short-Term credit would no longer get a loan – about 160,000 people a year
4.High-cost short-term credit firms currently charge the equivalent of 0.4% to over 4% per loan per day
5.Around 400 firms currently offer high-cost short-term credit in the UK, not necessarily as their core business.
The FCA will monitor the impact of the cap and review it in two years' time.
Important to note:
The FCA believes that at the proposed level of cap, three large firms will continue to offer payday loans and it is possible that one high-street firm will continue to offer it. An indication that the FCA anticipates that only four large lenders will remain in this market.
The FCA expects the cap will lead to a reduction in lending, with some customers no longer able to get the loans they could access previously. They believe that after an initial short term period these consumers will be better off without the loans.
The FCA decided not to specify the cap in terms of APR as it was not seen as an easy metric for comparing loans of different sizes and length.
Also under FCA consideration for further action
Real Time Data Sharing
They have confirmed that they see the benefit of real-time data sharing to enable firms to carry out more accurate affordability assessments and to prevent consumers from taking on multiple loans they cannot afford to pay back. The vast majority of HCSTC firms are expected to participate in real-time data sharing and to share data with more than one credit reference agency. The FCA has seen progress, but believes the HCSTC industry must do more. If there is no evidence of this progress by November, further action may be taken.
Given Guarantor Loans fall outside the definition of high cost and short term credit the consultation paper does not directly impact the industry. It is clear though soem of the key themes such as total cost of credit and defauly fees and charges will soon be industry wide.
"Here at GuartantorMyLoan we do not charge any late fees, or increase interest once you are in arrears, both of which are key elements that are recommended as part of this consultation document. In additional we incentivise customers to pay in full and on time by offering a cashback reward if the first 12 monthly payments are made in full and on time" commented CEO Rob Udy
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