Let’s cap the cost of all high-cost credit
It’s not that long ago newspapers were awash with horror stories of how payday loans were pushing people into dangerous cycles of debt. In response, the Financial Conduct Authority (FCA), the financial regulator in the UK, introduced a total cost cap on payday loans meaning consumers now can’t pay back more than twice what they borrowed.
The cost cap has been a success. The FCA should use its review of high-cost credit — which concludes today — to build on that success and extend the cap to other high-cost credit markets.
The regulation has been a success
Since the FCA introduced tougher regulations on payday lending, the number of people with unmanageable payday loan debts has more than halved. Problems seen by Citizens Advice have fallen from over 10,000 a quarter at their peak to just over 4,000 now.
Total payday loan issues seen by Citizens Advice
It has not led to significant problems elsewhere
There was a concern that tough regulation of payday lending would lead to knock on problems elsewhere. There is little evidence that has been the case. First, it has not led to financial exclusion — those who want credit can still get it and at more affordable prices.
Of the 8% of payday loan users who now can’t get one, most have access to other forms of credit. Even those who do often don’t decide to borrow if they are declined loans due to stricter rules.
It has not pushed the problems to other markets
Similarly, the regulation has not led to a surge of problems in other high-cost markets, such as for hire-purchase, or the doorstep loan market. At the same time as payday loan debt issues seen by Citizens Advice have fallen by half, the number of all high-cost credit issues has fallen by over 30%.
Change in payday loan and other high-cost credit issues seen by Citizens Advice
It has not been the primary cause of wider problems such as household arrears
A further concern was that excluding people from high-cost credit would lead to wider problems such as household arrears. While there has been a dramatic increase in the the number of people with household arrears coming to Citizens Advice in recent years, that has not been driven by a lack of access to short-term credit.
As shown below, the increase in people with council tax debt issues — which has driven the increase in people in arrears — started long before the introduction of tougher rules on payday lenders.
Total payday and council tax debt issues seen by Citizens Advice
It has not pushed people to loan sharks
Finally, the total cost cap has not led to more people going to loan sharks. Analysis of the debts held by Citizens Advice clients shows the number of loan shark debts has remained constant since the introduction of the cap.
Total Citizens Advice clients with loan shark debts
The FCA should build on that success
The FCA’s intervention in the payday loans market has been a success, but there are huge ongoing problems in similar markets where the cap doesn’t apply. In the doorstep lending market which provides loans to at least 1.3 million people — and is bigger than the payday loans market — in the rent to own market the guarantor, and logbook loan markets to name a few.
Each of those high-cost credit markets presents its own problems. But the FCA should build on its success and extend the total cost cap across all forms of high-cost credit. The total cost cap provides a simple and understandable safety net for consumers meaning that short-term financial difficulties do not lead to spiralling and persistent debt problems.
A cap of 100%, meaning people never pay back twice what they borrowed, is set well above any common interest rates, even in high-cost markets. It would not dramatically distort those markets, but would protect the most vulnerable consumers from severe problem debt.
