A Mindful Money view – a sensible decision to cap payday loan charges

25th November 2013

The Government has come to sensible decision to cap the amount payday loans firms can charge in interests and indeed in other charges as the BBC reports.

This is something Mindful Money has been calling, citing the situation in other countries in Europe and indeed in many US states. It seems that this particular decision has been prompted by practices in Australia. It doesn’t really matter which country inspiration has been drawn from. We think this is a good practice which the UK is borrowing.

The actual details have been passed to the City watchdog, the Financial Conduct Authority so we don’t yet know the terms of a cap. In Australia, the limit is 4% per month, after a maximum up-front fee of 20%.

It had already been indicated that loan firms would not be able to roll over loans more than twice in the UK. A competition inquiry is also being held.

Trade body the Consumer Finance Association which represents the payday loan firms has said that it could drive some people underground and into the arms of illegal loan sharks. We are not so sure, though surely it isn’t beyond the wit of regulators to test this. Comments from the Business Secretary Vince Cable this morning suggest the Government is alert to this risk.

Some had argued that a Competition Commission inquiry would have sufficed as a health check for the sector. At Mindful Money, we have argued that there is very little true competition when people using such services are often if not always desperate.

The intervention from mortgage broker John Charcol arguing that taking out such loans could count against individuals’ ability to get a mortgage, also suggests to Mindful Money that the supposed better off target market would be wise to think twice or even thrice before taking out such a loan.

There are some suggestions that this is a U-turn from the Government and particularly the Chancellor George Osborne, as Labour had called for a cap already. We think that outside the Westminster political and journalistic bubble, such talk means very little. What is important is that financially vulnerable people are likely to be less vulnerable in future.

But we have one concern. The FCA takes over responsibility for the loans in April 2014. It is likely that any cap will not come into force until 2015. While not suggesting such haste that the regulator gets things wrong, we wonder if things couldn’t happen a little faster.

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