CSFI

CSFI
Box 5: Payday lending and regulation
“The introduction of FCA regulation has transformed the high-cost
credit sector. The single-payment loan, which used to characterise
payday lending, has generally been replaced by longer-term loans.
The most common is a small sum loan repayable in instalments over
three to 12 months. These loans are still subject to the cap on the
cost of credit, which includes an interest rate of 0.8% per day, or £24
per month for each £100 borrowed. This cap means the loan cannot
exceed 100% of the amount borrowed, and that penalty fees are
limited to £15. There are no rollovers and no penalty fees for most
short-term products.
“The reason for the change in the structure of the industry is two-fold.
First, the FCA price cap has funnelled the lending market into a narrow
channel of loan options. Second, instalment loans are proving popular
with consumers. Many people are taking longer instalment loans, which
they often pay off before the full term. As the market diversifies and as
the FCA becomes more informed, we are likely to see more innovative
credit products challenging traditional loan offers.
“According to CFA members, the number of loans approved against
loan applications made has declined by 68% from the market peak
in 2013. On average, CFA members now approve only 8% of loan
applications. This trend is echoed by debt advisers. A Coventry
Citizens Advice Bureau manager commented recently: “Only 17 per
cent of people questioned said they had taken out, or were thinking
about taking out, a payday loan. Two years ago when we carried out
that survey, the figure was 75 per cent.”
“Despite the new lending landscape, the media continues to be
fixated on a debate that fails to recognise a fundamental truth. For
many reasons, the banks have a poor appetite for risk, which has
restricted access to credit for a wide segment of the population. As a
result, a credit void was created. Entrepreneurial short-term lenders
stepped into this space and sought to provide credit to those who
were excluded by mainstream lenders. More recently, High Street
lending has declined – with the largest store-based firms closing down
outlets in order to meet the requirements for authorisation or to reduce
overheads. Only around 20% of lending is now through High Street
stores. However, the demand for short-term credit still remains strong
and consumers continue to seek credit from non-mainstream sources.
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