Word on the web: Reining in payday lenders

The FCA's moves to clamp down on payday lenders charging excessive interest rates have been widely welcomed, but many believe more needs to be done to help those in need

The FCA has announced that 99% of the UK's 400 payday lenders will be forced to shut down when its cap on the cost of credit comes into effect early next year.

The price cap prompted the Competition and Markets Authority to set out proposals this month to increase price competition between payday lenders and help borrowers get a better deal.

The proposals come days after Britain's biggest payday lender, Wonga, was forced to write off £220m debts from 330,000 of its customers who have been arrears for more than 30 days.
"Need it always be the case that the poorest pay the highest price for borrowing?" From next January, a payday lender will be limited to charging a maximum of £24 for every £100 of debt it lends over 30 days, along with a cap on default penalties. Interest rates on payday loans sometimes exceed 5,000% annually.

Calling for moreAlthough Will Hutton of The Guardian welcomes the steps taken by the FCA, he says that until workers' wages rise in real terms, "rapacious lenders such as Wonga will remain a fixture of our world".

He urges more to follow the lead of Labour MP Stella Creasy and Archbishop of Canterbury Justin Welby, both of whom have spoken out against payday lending.

of UK payday lenders will be forced to shut down when the FCA's price cap comes into effect, claims the Authority

worth of customer debts have been written off by Wonga

for every £100 - the maximum that payday lenders will be limited to charging customers
"The FCA, too, has shown it has some teeth," writes Hutton. "But they constitute a very thin red line ... If Britain wants to get to the root of this problem, it will have to act more profoundly. We need stronger unions, substantive social lenders, a more generous social settlement and business to accept it must have ethics."

The Guardian article

Credit where it's dueSome have criticised the FCA changes as driving the 10% of customers who cannot borrow from other sources to undercover lenders. But Labour MSP Kezia Dugdale argues in the Daily Record that these customers can turn to credit unions to meet their borrowing needs.

"Need it always be the case that the poorest pay the highest price for borrowing? Surely there is a better way?" she asks. "Well, yes, yes there is. Credit unions are the answer.

"Nearly one in four folk in Glasgow are members of a credit union, but the rest of Scotland is largely oblivious. These member-owned co-ops are friendly, affordable and, crucially, professional institutions."

Daily Record opinion piece

We're only human
Curbs on payday lending, however, "will not abolish human frailty", writes John Kay in the Financial Times. "Society would be a better place if people learnt to manage without these facilities," he says. "But human frailty is such that they never will."

Kay says there are lessons to be learned from the impact of payday lending. "Financial services regularly fail to draw on the experience of regulation of other industries," he notes. "Change should always be incremental. Payday lending changed its character because technological changes made it possible to target a new demographic profile.

"A genie has escaped the bottle, and it has to be coaxed back gently; attacked directly, it is likely to prove slippery and evasive. The FCA has ample experience of regulation which fails for these reasons."

Financial Times comment (signup required)

Catching up with debt collectors The FCA has widened its investigation into the payday lending industry to include customers who may have been passed on to debt collection firms, writes Neil Craven for financial website This is Money.

"The 'lost' customers are, on the face of it, beyond the reach of the payday firms as they no longer own the debt, so cannot cancel it," writes Craven. " The situation is alarming because those in the hands of debt recovery firms are likely to be the worst off and under intense financial pressure."

He adds that Wonga is working with the FCA to identify anyone affected and look at remedies.

This is money story

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Published: 10 Oct 2014
  • News
  • Word on the web
  • integrity and ethics
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