Calculating the price cap on Payday Loans - high cost short term credit – FCA

[Legal Beagles]

A price cap on high-cost short term credit - FCA

Weighing up the evidence
To inform our proposed price cap on high-cost short-term credit (PAYDAY loans) the FCA carried out one of the biggest ever studies of this market. This involved gathering significany amounts of data on both the supply side ( payday loan firms ) and the demand side ( consumers ) and then using this to analyse the likely costs and benefits of different approaches. The scale of our analysis provides a rigorous basis for us to make an informed, evidence based judgment about the structure and level of a cap.

1) What happens to firms and firm's lending decisions as a result of a cap ?
2) What options are there for consumers who no longer have access to high-cost short term credit?
3) Are consumers better or worse off as a result of not getting high-cost short-term credit ?




The FCA looks at cost revenue and repayment records for 2.3million individuals
Ran a qualatative survey of over 100 payday loan firms
Looked at the costs revenue and repayment records for 16m loans
Investigated 52 million records for credit products
Conducted 2000 interviews with consumers by telephone
Looked at the credit scores for 4.6million individuals

POSSIBLE OUTCOMES FOR LENDERS - reduction in profits // Reduction in price of loans // Market exit
POSSIBLE OUTCOME FOR CONSUMERS - Missed bill payments // Impact of Debt Balances // Doing without // Going to a Loan Shark

[Amethyst]

Re: Calculating the price cap on high cost short term credit – FCA

If anyone is particuarly interested - here is a report from 2011 from the USA regarding the effect of PRICE CAPS on PAYDAY LOANS (of between 350% and 600%) on both consumers and lenders. The report advocates a cap of 36%

Lower-cost alternatives: As regulation of payday lending becomes more prevalent, banks and credit unions have filled this void with short-term lending programs of their own, some of which charge less than payday loans. Increasing the market of financially viable alternatives for users of payday loans, and making these alternatives more convenient, will limit repeat borrowing of high-cost loans.

[Amethyst]

Re: Calculating the price cap on high cost short term credit – FCA

In 2010 the OFT specifically rejected price controls (interest rate caps):

We are aware that price controls can represent an efficient way to address concerns
around high profits among suppliers and could, initially, limit the headline prices paid
by consumers in the high-cost credit sector. We are, however, also aware that the
strategic responses by suppliers to price controls may lead to an outcome in these
high-cost credit markets which is unlikely to be of benefit for consumers.
The imposition of price controls in high-cost credit markets creates a risk for suppliers
that they would generate lower profit levels. It would be reasonable to expect these
suppliers to respond to the imposition of a price control by seeking to regain such lost
profit by restricting the type and risk of consumers that they are willing to supply. In an
extreme case of a highly restrictive price control for high-cost credit, some suppliers
could cease offering a particular product or exit the market entirely.

This potential for reduced access to high-cost credit would be of concern for the
following reasons:

• The supply of high-cost credit is already constrained, with many consumers having
limited options and in some cases few practical, alternatives to high cost credit
(particularly in the short term).

• Many consumers using high-cost credit are using this for non-discretionary
expenditure. Any reduction in access to this would have a significant impact on their
ability to manage their finances effectively.

We also consider that the development of a system of price controls for high cost credit
in the UK would be complex, expensive and difficult to administer for the following
reasons:

• There are a number of different high-cost credit products available at different prices
with different costs based on the product characteristics and target consumers.
Imposing price controls would be difficult in these markets, as detailed investigations of
the pricing and profits of suppliers would be needed at a product-by-product level.
• The imposition of price controls may lead to suppliers of high-cost credit responding
by imposing a more stringent regime for late payments and default. We would be
concerned with such an outcome, as these charges are not always transparent to even
the most savvy of consumers. The low incomes of many consumers of high-cost credit
would also increase the concerns around the impact of such changes if they were to
occur.

• Circumvention of price controls is a relatively common problem for jurisdictions that
already have a form of price control, and is likely to be the case for high-cost credit.
While designing a sophisticated price control with substantial resources devoted to
monitoring compliance could reduce the instances of known circumvention, the need
for different controls for the range of high-cost credit products would make the
possibilities for circumvention difficult to eradicate and manage on a proportionate
basis.

Put very simply, if the high cost lenders were forced to charge less for loans they would
either find ways to wriggle around the rules or stop providing the loans. Since it is unlikely
that the borrowers would simultaneously stop needing to borrow, borrowers would be forced
to borrow from other sources, possibly even more expensive unlicensed lenders. For further
reading on this readers may like to look at an academic study on the supply of credit to poor
households commissioned by the Joseph Rowntree Foundation: Affordable credit for low
income households.

[Amethyst]

Re: Calculating the price cap on high cost short term credit – FCA - Payday Loans

Consumer Finance Association fight back against price caps.... Unintended Consequences CFA



better copy on attached PDF

[Amethyst]

Re: Calculating the price cap on Payday Loans - high cost short term credit – FCA

http://www.legalbeagles.info/forums/...HAVE-YOUR-SAY-!

http://www.fca.org.uk/news/cp14-10-p...rt-term-credit