It set new rules, effective from January 2015, ensuring that interest and fees do not exceed 0.8 per cent, per day, of the amount borrowed. That means if you borrow £100 for 30 days and pay on time, you will not pay more than £24 in fees and charges. Fees for defaulting have been capped, and there is a total cost cap ensuring that consumers would never have to pay back more in fees and interest than 100 per cent of the amount borrowed. The market inevitably shrank.
The rise in county court judgments last year demonstrated that more people are struggling with their personal debts, and there were predictions of a hunting ground for loan sharks as payday pulled back. But the regulator is pretty happy with the market impact of the cap, according to a review published last month, alongside tougher proposed rules on assessing creditworthiness.
The FCA found “no robust evidence” that spurned borrowers are turning to illegal lenders: although it is not obvious why they would volunteer this information. The high-cost, short-term credit market that has remained now sees lower levels of arrears and defaults and a much lower cost of borrowing: amounting to £150m in aggregate savings for the 760,000 borrowers each year.
This is welcome. A lot of the business that is now unprofitable shouldn’t have been written in the first place. Any provider claiming they are providing a service for those who can’t go elsewhere should look at the FCA research: four out of 10 customers use payday for the ease and speed, rather than financial imperative. One-third did not even consider the alternatives.
Despite signs of market “fragility” given the cut to lenders’ margins, the cap will remain at its present level while the good folk at Canary Wharf watch to see who sinks and who swims. Indeed, the regulator has bigger ambitions. The strongest language in the report was reserved for unarranged, or unplanned, overdrafts: “Charges are high, complex and potentially harmful...there is a case to consider fundamental reform of unarranged overdrafts and consider whether they should have a place in any modern banking market.”
These charges can outstrip even payday loans. If they aren’t long for the financial world, banks are already getting ready. The UK’s biggest retail lender, Lloyds Banking (LLOY), will change its overdraft rules in November to simplify charges for planned overdrafts (1p per day for £7 usage), and remove fees and charges for unplanned usage. Other banks are getting in line. Although unhelpful to banks' 'other income', the impact on profits is unlikely to be substantial.
Meanwhile, the home-collected credit providers – Provident Financial (PFG), Morses Club (MCL) and one arm of Non-Standard Finance (NSF) – await their fate. It appears that regulatory intervention into payday pushed some borrowers towards the longer-duration instalment loans that these companies offer. These are easier for regulators to accept, too: their flexibility means overall default rates are lower, even if borrowers are more likely to fall into arrears.
But conditions are worsening. The median ratio of users' outstanding personal debt to net income reached 22 per cent in January, from 10 per cent two years earlier. To counter long-term indebtedness, the FCA is considering restrictions on refinancing and rollovers, time gaps between borrowing and time limits on the total duration of borrowing. Remedies will be consulted on in spring 2018.
Still, some perspective is needed. The 1.6m people that use home-collected credit compares with the 8m that use catalogue credit or 'rent-to-own' finance for household purchases. The latter, smaller market has seen the median debt rise from £2,000 to £4,300 in the two years to November 2016, while for catalogue credit it has risen from £300 to £1,300. There are signs of stress everywhere, and that's ignoring the much larger motor finance and credit card markets. Regulators and shareholders alike should keep a wide lens.
Ian Smith is companies editor
