Background
On 1st April 2014, the FCA took over the regulation of consumer credit firms, including those providing high-cost short-term credit (HCSTC or so-called payday lending). It subsequently announced a number of actions intended to respond to concerns about HCSTC, including a consultation on a cap of the total cost of credit.
How is the cap structured?
The FCA has proposed the introduction of three forms of price cap from January 2015:
1) The Initial Cost Cap
A cap on interest charges at 0.8% per day of the outstanding principal, which includes all interest and fees charged throughout the agreed loan duration. The FCA decided against specifying the proposed cap in terms of APR, instead favouring a calculation that is directly proportional to both the loan amount and the duration of the loan. The 0.8% rate cannot be applied on a compound basis.
2) The Default Charge Cap
Fixed default charges are capped at £15. A 0.8% per day cap also applies to default interest.
3) The Total Cost Cap
A total cost cap of 100% of the original principal applying to all interest, fees and charges. Thus, this cap will ensure that borrowers will never pay back more than twice the total amount borrowed.
The FCA explains that a loan of £100 for 30 days would incur a maximum of:
- £24 throughout the agreed loan duration (based on the 0.8% initial cost cap)
- Up to £15 fixed fees, should the customer default
- Maximum default interest charge of 0.8% per day, up to £61 (capped at £61 because of the total cost cap of 100%)
Which products will the cap cover?
In determining which products the proposed cap will cover, the FCA announced that it plans to use the current definition of HCTSC in the new rules. Thus, the cap will affect a regulated credit agreement:
a) Which is a borrower‑lender agreement or a P2P agreement;
b) In relation to which the APR is equal to or exceeds 100%;
c) Either:
- In relation to which a financial promotion indicates (by express words or otherwise) that the credit is to be provided for any period up to a maximum of 12 months or otherwise indicates (by express words or otherwise) that the credit is to be provided for a short term; or
- Under which the credit is due to be repaid or substantially repaid within a maximum of 12 months of the date on which the credit is advanced;
d) Which is not secured by a mortgage, charge or pledge; and
e) Which is not:
- A credit agreement in relation to which the lender is a community finance organisation; or
- A home credit loan agreement, a bill of sale loan agreement or a borrower-lender agreement enabling a borrower to overdraw on a current account or arising where the holder of a current account overdraws on the account with a pre-arranged overdraft or exceeds a pre-arranged overdraft limit.
How will the cap affect firms?
The FCA acknowledges that the cap is expected to -
a) Drive some firms out of the HCSTC market
b) Reduce pricing flexibility
c) Reduce competition
Indeed the FCA “modelling suggests that at 0.8% the three largest online firms will be able to continue to offer high‑cost short‑term credit, and that it is possible that one high‑street firm may be able to operate.”
What more can be expected?
Responses to the Consultation Paper should be sent to the FCA by 1st September 2014. Following this the FCA plans to release their final rules in November 2014 before the introduction of the measures in January 2015.
The price cap will be reviewed in two years’ time.
Comments
The FCA continues with its onslaught against payday lenders.
With its stated intention to “drive up standards” which may likely be achieved by driving most firms from the sector, the FCA must nonetheless be cautious of instead driving higher risk customers, who may not be serviced by the remaining players, into the arms of unregulated and unscrupulous lenders.
