CP14/10: Proposals for a price cap on high-cost short-term credit – Financial Conduct

[Legal Beagles]

Our proposals for a price cap on high-cost short-term credit The high-cost short-term credit industry (including payday loans) has grown rapidly in recent years, as many consumers look for quick and easy borrowing to manage their finances. We began regulating these firms on 1 April 2014, with a strong commitment and clear remit to tackle […]

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[Amethyst]

Re: CP14/10: Proposals for a price cap on high-cost short-term credit – Financial Con

What is our price cap?

Our cap ensures that consumers will never need to pay back more than twice what they have borrowed, and someone taking out a typical loan over 30 days and repaying on time will not pay more than £24 per £100 borrowed.
We looked at the potential impact of our price cap on firms and consumers, and we believe that it is proportionate and will benefit consumers.
We expect the cap to lead to a reduction in lending and some customers who have previously taken out high-cost short-term loans will no longer get them. However, we believe that, apart from for a short initial period, they will be better off without loans.
Initial cost cap

We tested a range of charges between 0.4% and 1% per day. A 0.8% cap per day lowers prices for borrowers who pay back their loans on time. This is calculated as a daily rate, which means the cost of the loan is directly proportionate to its duration.
Calculating the initial cost cap according to a percentage of the loan also means that pricing is proportionate to the size of the loan, so consumers only pay higher prices if they borrow more. This is fair for firms too, as the majority of their costs increase with the size of the loan. It also means they still have some flexibility to choose their own pricing structures.
Caps on default fee and default interest

It is reasonable not to prevent firms making a charge as they incur costs when a borrower fails to repay on time, so long as they are not excessive and they treat borrowers in default or arrears difficulties with forbearance and due consideration. We think that a £15 cap on default charges reflects the need to provide consumers with an incentive to pay back on time, whilst also providing the right incentive to firms by not rewarding failure to properly assess affordability.
Total cost cap

The total cost cap protects borrowers from escalating fees and charges on longer loans.
We tested a range of total caps from 50% to 200%. We believe 100% balances protecting consumers and allowing firms to continue offering loans for different lengths of time. Taking into account behavioural factors, we also think a 100% total cost cap would be easier for consumers to understand and help them to identify any lenders that charge them more.

[Amethyst]

Re: CP14/10: Proposals for a price cap on high-cost short-term credit – Financial Con

Next steps

Please send us your responses by 1 September 2014 using the online response form, or by writing to us at the address on page 2 of the CP.
We plan to publish our final rules in early November to give firms time to prepare for the introduction of the price cap on 2 January.