Payday Loan Firms Slapped With Price Cap

The City regulator is imposing a price cap on payday loans to help prevent borrowers being ripped off.

The Financial Conduct Authority's (FCA) initial cost cap will come into force on 2 January, set at 0.8% per day.

The watchdog said that would lower costs for most borrowers, explaining that 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 will be capped at £15 to help protect borrowers struggling to repay.

A total cost cap of 100% was aimed, the FCA said, at shielding people from escalating debts and it meant that borrowers must never have to pay back more in fees and interest than the amount borrowed.

The regulator said the changes would ensure that someone taking out a loan for 30 days and repaying on time will not pay more than £24 in fees and charges per £100 borrowed.

It announced the changes in July but put the conclusions out to consultation to try and ensure they were fair .

The FCA said it now estimated that 7 % of current borrowers may not have access to payday loans - some 70,000 people - after its new reforms take effect.

It added: "These are people who are likely to have been in a worse situation if they had been granted a loan. So the price cap protects them."

However, there is concern the rules risk driving such borrowers towards loan sharks and the Consumer Finance Association (CFA), which represents a number of payday lenders, warned the numbers barred from short-term credit would be much higher.

Its chief executive, Russell Hamblin-Boone, said: "Higher standards of conduct have gone hand in hand with a reduction in loans being approved.

"With the cap, fewer people will get loans from fewer lenders but the demand for credit will still be there and so there will be no significant impact on debt levels.

"The warning signs are already there. Only a quarter of people turned down for loans under tougher lending criteria said that they were better off not getting the money; the rest incurred charges for missed payments.

"The regulator will need to monitor this closely and act to prevent illegal lenders filling the credit gap."

FCA chief executive Martin Wheatley said: "If the price cap was any lower, then we risk not having a viable market, any higher and there would not be adequate protection for borrowers.

"For people who struggle to repay, we believe the new rules will put an end to spiralling payday debts."