As the FCA announces a series of proposed measures aimed at restricting the costs to consumers of payday loans; Harrington Brooks ponders that while the FCA’s intention is to protect the consumer; the law of unforeseen consequences may paint a different picture.
View Proposals for a price cap on high-cost short-term credit on FCA website.
If, according to the FCA stats released at the same time as yesterdays news about the proposed cap on payday lending, the average loan has a principal of around £260 lent over an initial duration of 30 days – where will borrowers get the additional £160 from?
And if the typical customer has no savings, 57%, a lower than average income level of £16,500 verses £26,500 per year and 64% have outstanding debt from other types of lenders, 36% have borrowed from family, 18% from friends – then where do they turn?
If it is the case that 55% said they used their loans for everyday expenditure (housing, basic living costs and bills) then what will they do? What alternatives are there?
In the findings, 20% said they used their pay day loan for discretionary spending such as holidays, social activities, weddings and gifts – then should they just do without? Are these necessities? Who decides?
The FCA have a very hard task facing them, and one which is bound to raise criticisms, but at least, it seems, they went in to making these changes with a raft of evidence and research behind them. The FCA carried out unprecedented levels of research which involved:
- building models of 8 firms and 16 million loans to analyse the impact on firms and consumers post-cap
- analysing credit records for 4.6m people to understand the alternatives people turn to when they don’t get payday loans and whether they are better or worse off
- a survey of 2000 consumers that use payday firms to understand the impact on people who don’t get past the approval process and those who do get loans
- liaising with overseas regulators that also use a cap and reviewing existing research
- discussions with industry and consumer groups
Improvements Since Regulation
It’s easy to see where the FCA have made obvious improvements. Since it took over regulation of consumer credit the FCA has strongly encouraged firms and credit reference agencies to improve the way they share information about consumers, so firms can be sure that the information they use in their affordability assessments is up-to-date and accurate. Effective real-time data sharing should enable firms to address the issue of consumers taking out multiple high-cost short-term loans from different providers at the same time that they are unable to afford.
The FCA expects to see evidence of a significant increase in firms participating in real-time data sharing by November, and better coverage by real-time databases. If we do not see the level of progress we require, we will consult on the introduction of data-sharing requirements.
Impact on Debt Resolution Sector
And finally, what effect will this have on Harrington Brooks and the debt management sector?
Well, 47% of Harrington Brooks customers have payday loans, typically 3 and with different lenders, so it’s likely that we’ll see a change in the formation of customers debt, however the FCA did also include in their report about financial distress. Since applying for a loan, 50% reported experiencing financial distress and 44% missed at least one bill payment suggesting that these people do need help to manage not just pay day loan debts, but a range of others too.