Following the proposal for a cap on interest rates and fees when using a payday loan service in July, the FCA have today announced clear terms for the lending of payday loans, introducing price caps to the terms of money borrowed. The price cap will come into effect on 2nd of January 2015. Following the consultation the overall structure of the price caps and levels based on borrowing have not changed. These are:
- Initial cost cap of 0.8% per day – Lowers the cost for most borrowers. For all high-cost short-term credit loans, interest and fees must not exceed 0.8% per day of the amount borrowed.
- Fixed default fees capped at £15 – Protects borrowers struggling to repay. If borrowers do not repay their loans on time, default charges must not exceed £15. Interest on unpaid balances and default charges must not exceed the initial rate.
- Total cost cap of 100% – Protects borrowers from escalating debts. This means that Borrowers must never have to pay back more in fees and interest than the amount borrowed.
What this means is that when the regulation is in place from the 2nd January 2015, a borrower will never have to pay back more than double the amount borrowed, and if someone was to borrow £100 over a period of 30 days the maximum amount they could be charged in fees and interest would be £24. Further to this, The FCA was also clear that they wanted to see at least 90% of firms participating in real time data sharing. The FCA feels that they are in line with these exceptions and as a result no further consultation is required at present.
This applies to short term credit classed as ‘high cost short term credit agreements’ which is defined as credit with an annual percentage rate (APR) which is equal to or exceeds 100% and is due to be substantially repaid within a maximum period of 12 months. What must be noted is that it doesn’t cover credit agreements secured by a mortgage or a charge or pledge nor a credit agreement where the lender is a community finance organisation or a home credit loan agreement, bill of sale loan agreement or overdrafts.
What happens if you already have a payday loan?
If there is an existing agreement by a consumer to borrow and it is revised after the date of the FCA Price Cap 2nd January 2015, the fee caps will apply and a such fees already charged plus future fees cannot exceed the new guidelines.
What happens if your lender charges you more than the sums allowable under the price cap rules?
It is understood that your loan will become unenforceable. This means that the capital is still payable by you but only once the lenders has repaid the interest or charges to you or indicated that there are no charges to repay. So you will still have a duty to pay the principal owed (the amount you borrowed) in a reasonable period of time. The firm cannot make a demand in less than 30 days.
Why have these price caps been brought in?
Bev Budsworth Managing Director of The Debt Advisor Ltd comments, “it will come as no surprise to pay day lenders who have been in the FCA’s sights for the past 12/18 months. Their activities which included charging interest at £000’s % in interest, providing loans to those who clearly could not repay their loans, unlimited rollovers of the loans, huge penalties plus collection methods which included pretending they were either solicitors or bailiffs have most definitely come home to roost”.
Price Cap Consultation
During the initial proposal put forward in July, The FCA consulted a number of high ranking professionals in the industry as well as professional bodies, stakeholders, consumer groups and academics. In July, The FCA felt that around 11% of borrowers currently eligible for a payday loan would no longer be when the price cap came into effect. However, due to the effect of new FCA regulation, the number of loans as well as the amount borrowed has dropped by 35%. The FCA estimates that approximately 7% of borrowers who were previously able to access pay day loans, will now be unable to access this type of short term credit. The FCA feel that those that fall into this category would be in a worse situation if they were able to borrow.
E-Commerce Directive
The FCA has stated that as a result of the price cap:
- UK-based debt collectors will be prevented from collecting debts arising under HCSTC agreements entered into by incoming ECD lenders whose charges exceed the price cap.
- UK-based debt administrators will not be able to enforce or exercise rights on behalf of a lender under such HCSTC agreements.
What is going to happen?
Going forward the FCA have pledged to assess the impact on consumers of repeat borrowing, and whether firms are taking reasonable measures to assess affordability for consumers.
The Treasury have plans to put forward in front of parliament an order to confer power onto The FCA to take action if lenders abuse the EU right of free movement, by establishing an outlet in another member state which directs all or most of its activities into the UK, with a view to avoiding rules that would apply.
More advice will be readily available for those that consider payday loans. This has begun with The Money Advice Service publishing new advice to help those looking to borrow. The price cap will be reviewed in 2017 to assess its impact on protecting consumers.
If you are struggling with debt issues, whether these are business or personal debts, The Debt Advisor Ltd which incorporates The Business Debt Advisor can help. There are a range of solutions available which include both formal and informal solutions such as Debt Management Plans (DMP), Individual Voluntary Arrangements (IVA), Bankruptcy as well as solutions for Businesses.
There is also free help and advice available through a variety of debt charities. For more information, we recommend you visit www.moneyadviceservice.org.uk.
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