UK watchdog to review interest rate cap on payday loans

The cap on interest rates charged on payday loans and charges on unarranged bank overdrafts will be reviewed to see if changes are needed, Britain's Financial Conduct Authority (FCA) said on Tuesday.

The payday loan cap came into force in January 2015 after concern among lawmakers and the Church of England about the impact very high interest rates have on vulnerable people taking out short-term loans to tide them over until payday.

The regulations, introduced in 2015, cap interest rates at 0.8 per cent a day, but rates as high as 1,509 per cent persist

“The FCA will assess whether there is evidence that suggests that the cap should be changed. The FCA is also keen to see if there is any evidence of consumers turning to illegal moneylenders directly as a result of being excluded from high cost credit because of the price cap,” the watchdog said in a statement.

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Loan sharks

Critics of the cap have said it would drive vulnerable people into the hands of loan sharks. The examination of the cap, whose findings will be published next summer, will be part of a broader review of “high cost credit” to see if any policy measures are needed. The watchdog defines high-cost credit as including payday loans, home-collected credit, catalogue credit, some instances of “rent-to-own”, pawnbroking, guarantor and logbook loans.

Motor finance, credit cards, overdrafts and some instalment lending could be included, the FCA said. Britain’s Competition and Markets Authority was heavily criticised by lawmakers for what they saw as failing to tackle high fees on unarranged bank overdrafts.

“The FCA will look in more detail at overdrafts from a consumer protection, as well as a competition perspective, using its full range of powers,” the watchdog said.

– Reuters