Payday lenders may vanish within year as result of price cap, says economist

Price caps on payday loans to be revealed by the regulator on Tuesday could see the controversial lenders disappear from the high street within a year, according to one expert who has worked on the policy with the watchdog.

In July, the Financial Conduct Authority said it was planning to limit interest on short term loans to 0.8% a day and cap the total fees and charges at 100% of the initial loan, starting from January.

In its original assessment, the regulator said that its modelling suggested such a cap would mean that only one high street firm and three online lenders could continue to operate at a profit without changing their business model.

But Dr John Gathergood, an associate professor in economics at the University of Nottingham who has worked with the FCA on the cap, said the assessment was now bleaker for the high street lenders. It may well be the case that there are no high street payday lenders operating in the UK next year as a result of the price cap policy.

He said: “The FCA needs to strike a balance: lowering the price benefits consumers, but lowering the price too much will cause firms to exit the market as it will be unprofitable to lend. This is especially the case for high street lenders who have higher overhead costs.”

The move to consider a price cap that is estimated could save consumers around £193 year came after a U-turn by the government and was put out to a consultation that ended earlier this month.

If the FCA confirms a cap below 1%, it could reverse the recent boom in high street loan shops as hundreds of branches of lenders such as the Money Shop and Cash Converters have sprung up around the UK.

During the consultation, debt charities told the FCA they believed even the charges capped at 100% would still harm customers and urged the regulator to consider a lower overall limit, particularly on higher loans.

One charity, StepChange, also called for lower default fees for consumers who got into difficulties with their loans. In its submission to the regulator it said it was concerned that while the FCA had found that 50% of payday borrowers had experienced financial detriment, just 11% of people would be prevented from getting a loan as a result of its proposals. “That means that more than four in 10 [payday] borrowers in the price-capped market would remain at risk of real financial detriment as a result of taking out a loan. This is considerably short of the level of consumer protection that we believe is necessary.”

Lenders have suggested the proposed cap could force consumers into the arms of illegal money lenders, including online firms operating from outside the UK. Firms have already been forced to introduce new affordability checks and make changes to how they collect loans, and this has resulted in some borrowers being turned away.

Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents some of the best known payday lenders: said: “It’s too early to speculate on the detail but we do know that a cap on the cost of credit will mean many people will struggle to manage who previously borrowed and paid back small sums over short periods.”

He said that demand for credit was unlikely to change even if availability fell. “We know that only a quarter of those turned down for loans since lenders tightened their borrowing decisions said that they were better off not getting the money; the rest racked up charges for missed payments,” he said.