Payday lenders have become demonised over the last couple of years for preying on the poor, with loan APRs that can easily exceed 4,000 per cent. In response to this, the UK government announced in November 2013 that the Financial Conduct Authority (FCA) must introduce some limitation on the cost of credit by January 2015.
Announcing the proposed crackdown, the Government cited Australia as an example of a country where such a credit cap works well. However, Australia only implemented its national interest rate cap in July 2013 and there has been no systematic evaluation of its impact. Our recent interviews with key stakeholders, as part of a project funded by the Arts and Humanities Research Council, reveal a number of lessons to be learnt here.
First, the interest rate regime in Australia is complex as it is a tiered system and there is no requirement on lenders to inform borrowers of the APR on loans. This can make it difficult for consumers to compare the cost of different loans.
The maximum interest rate allowed is 48 per cent per annum, but lenders are also entitled to charge an ‘establishment fee’, which means that loans of around 300 per cent APR are easily permissible.
The cap appears to have resulted in increased avoidance activity, and further regulations have already been drafted to tackle this issue.
There also appears to have been a drop in the number of lenders in this part of the credit market, although this may be due to a combination of the cap and more onerous obligations on lenders to check affordability (for the example, the requirement to check the bank account transactions of borrowers for the previous 90 days).
The cap has received mixed reactions from Australian stakeholders, with some arguing it has been set too low and so will result in a drastic reduction of credit available to certain groups; others argue it has been set too high and so will fail to reduce the problem of high-cost credit.
The FCA, and other bodies, therefore needs to take care when drawing lessons from Australia, given the lack of systematic evaluation of the cap and major differences between Australia and the UK in terms of the responsible lending obligations, potential penalties for breach of lender obligations and differences in supply-and-demand for credit.
The new credit cap for payday lending will be introduced alongside a number of other major changes in regulation, as the FCA (which took over responsibility for regulating all forms of consumer credit, including payday lending, in April this year) has also gained tougher powers than the previous regulator, the Office of Fair Trading. These include unlimited fines, ordering refunds and banning misleading advertisements. It has also announced that it will limit – to two – the number of times a customer can roll over a loan, improve affordability checks and control the practice of lenders taking automatic repayments from borrowers' bank accounts.
The FCA will announce details of the new cap later this year and the precise level and nature of the cap will, alongside these other changes, make a considerable difference to the consumer credit landscape over the coming year.
Karen Rowlingson, Professor of Social Policy
Jodi Gardner, Research Fellow