City watchdog to consider watering down payday loan price cap

The City watchdog is to consider whether it should water down a cap on charges by payday loan companies such as Wonga.

The Financial Conduct Authority (FCA) said it was keen to find out whether the cap meant consumers were being driven to illegal loan sharks because they were excluded from getting credit.

It is part of a broader review of high-cost credit to see whether rules need to be extended to other types of loans.

These include rent-to-buy deals, charging rates of up to 99.9%, for products such as washing machines and fridge-freezers, which campaigners say is a growing problem.

A cap on interest rates on payday loans and unarranged bank overdrafts came into force in January 2015 after a chorus of concern about the industry.

MPs (BSE: MPSLTD.BO - news) and the Church of England spoke out about the impact of very high rates on vulnerable people borrowing money to tide them over until their next payday.

The cap, set at 0.8% per day, was introduced under former FCA boss Martin Wheatley, who said the new rules would "put an end to spiralling payday debts".

It also limits charges for those who default on loans and an overall limit means that a consumer who borrows £100 would never repay more than £200.

The FCA is now reviewing high-cost credit including the payday loan price cap.

New (KOSDAQ: 160550.KQ - news) chief executive Andrew Bailey said it would "consider whether our requirements remain appropriate".

The FCA said it will "assess whether there is evidence that suggests that the cap should be changed".

It added: "The FCA is also keen to see if there is any evidence of consumers turning to illegal money lenders directly as a result of being excluded from high cost credit because of the price cap."

Findings are expected to be published next summer.

The FCA's wider review will look into pawn broking and rent-to-own loans, while some motor finance, credit cards and overdrafts could also be included.

It said the evidence would be used to help it consider "whether further policy interventions are needed".

Citizens Advice said that the number of people with payday loan problems had halved since the introduction of a price cap.

But it said in a new report that it was seeing growing numbers of people getting into difficulties with rent-to-buy loans.

Most consumers who used these products did so because they cannot afford to buy them up front.