City Commentary: FCA Killed Payday Loans, But What Next Could Be Just As Bad For Borrowers | London Evening Standard
Heers moved from Lambeth Palace to Westminster City after the Financial Conduct Authority watchdog cracked down on Wonga-type payday loans in 2015.
But two years later the applause has stopped, replaced by fears about whether the payday assault has inadvertently led to a host of new headaches for borrowers.
The FCA, led by Andrew Bailey, is investigating the impact of the cap on borrowers.
Early evidence from industry groups and charities indicates that increasing numbers of people are being excluded from credit markets or being pushed into other forms of high-cost lending.
“You can regulate supply but you can’t regulate demand,” said Jane Tully of Money Advice Trust, who praised the salary cap but fears the problems have been shifted elsewhere.
“Potentially, there could be people accessing different forms of credit and they are more likely to get into debt because there is no credit available.”
The FCA loan cap was designed to tighten lending practices and protect borrowers, but it also removed the offer of payday loans, leaving many without the means to borrow.
At its peak, the market was dominated by three companies – Wonga, Dollar Financial, owner of Money Shop and CashEuroNet, which backs QuickQuid – but all were forced to pull out of payday lending.
Wonga’s revenue fell 64% last year, and Dollar Financial put Money Shop up for sale after closing hundreds of stores. CashEuroNet has also been stung by regulatory fines.
According to Russell Hamblin-Boone, managing director of the Consumer Finance Association, which represents 12 of the UK’s largest payday lenders, the industry is now targeting “a higher demographic”, but this has had unintended consequences .
When the FCA launched its consultation in November, Bailey said he wanted to find out if there had been any “water bed” effects from the ceiling.
One of the areas of focus will likely be a drastic increase in the number of people missing their utility bills since the cap was deployed.
Debt charity StepChange, which works with people in financial difficulty, said the largest number (40%) of its customers miss a bill or take other forms of short-term credit (34%) if they are refused for a breakdown. to lend.
“They will say they missed paying their bills because if they hadn’t, they wouldn’t have the money to feed their children or pay for their commute to work,” says Laura. Rodrigues, political advisor of the association. “People are faced with these impossible choices. “
She added that there was a “market gap” for alternative forms of credit and that there were questions about what the FCA issues were and the social policy issues.
The squeeze on the supply of credit – the Consumer Finance Association estimates that around 600,000 people may struggle to obtain short-term credit as lenders pull out of the market – has also forced borrowers to jump into debt. arms of more unscrupulous lenders.
“Those people excluded from short-term loans by tighter accessibility controls must switch to more expensive products whose prices are not capped and have not yet been subject to the same regulatory scrutiny,” Hamblin said. -Boone, referring to products such as secured loans. , logbook loans and unauthorized overdrafts.
The growth of these products, particularly the option-to-buy rental loans offered by appliance vendors like BrightHouse, PerfectHome and Buy as you View, have come under political scrutiny due to their low rates. ‘high interest.
Influential groups such as the Financial Services Consumer Panel, which advises the FCA, have called on the government to crack down on these types of credit in the same way as payday loans.
FSCP President Sue Lewis said protections applied to high-cost short-term credit should be applied “to all forms of consumer borrowing,” and unauthorized overdrafts have also been criticized.
The FCA plans to present its post-cap policy this summer – it will need a sharp knife to pierce the thorns that have developed in the high-cost credit market since the slap in the face.