Financial Conduct Authority - Proposals for a price cap on high-cost short-term credit
Response to discussion paper
Credit unions are often cited as a solution to the growth of payday lending in the UK. However, while credit unions do seek to serve those who are unfairly excluded from access to affordable credit, there are clear limits to what credit unions are able to, or should do, in terms of directly competing with payday loan products. The challenge credit unions face today is in building a sustainable business model, from the foundation of a diverse membership base, by developing a compelling offering for the consumer. This does not necessarily sit neatly alongside providing analogous but less expensive payday loans. Credit unions can certainly play a role here but generally this involves providing a responsible solution to individuals’ long-term financial health and therefore regulation of the payday lending market must also be a part of the solution. It is for this reason that we and our members are very supportive of the proposed cap which we think will help to alleviate some of the worst excesses of the payday loan market which credit unions see every day.
We are supportive of the proposed cap level and are encouraged by the robust analysis which has clearly gone into its calibration. While we understand that some would like the cap to be taken further, we are of the view that the worst offenders in the market will certainly be prevented from continuing to operate and that a review after two years of operation will allow the FCA to establish the appropriateness of the cap level and whether it should be adjusted.
Our principle interest in responding to the consultation is to highlight an area in which we believe the FCA proposals could go further. While price is clearly an issue in the payday loan market, we are also greatly concerned by the affordability of the “bullet” repayment schedule which sees the loan principal and interest repaid in one sum. Of course there are cases in which this works for the consumer, however, in many instances bullet repayments are entirely unaffordable implying, as they do, that a substantial proportion of the borrower’s income must be set aside for repayment.
As such we would like to draw your attention to research by the US Pew Institute which looked at a variety of state-level regulatory responses to payday lending to establish which had the best outcomes for consumers. Their ultimate conclusion was to identify Colorado’s approach as the most successful. Here, rather than imposing only a price cap – as many states have done – state authorities required loans to be repaid over a number of months rather than in a single repayment. In this way, credit availability was not restricted – which is often the criticism of capping – but repayments were made more affordable and therefore less detriment resulted. Pew’s ultimate policy recommendation is to limit payday loan repayments to 5% of a borrower’s monthly income in order to ensure they are affordable.
This finding is also backed up by the independent evaluation of London Mutual Credit Union’s CUOK! affordable payday loan product. London Mutual offered borrowers taking out the CUOK! product the option to repay their loan over one, two or three months – in almost 60% of cases, borrowers opted to repay over the full three months. This further evidences the fact that in the majority of cases, it is the unaffordability of repayments, rather than the interest price of a loan, which causes detriment under the payday model.
Therefore, while we are supportive of the proposed cap we would also recommend that FCA lends more emphasis and detail to its affordability requirements. This however raises a further issue which is rightly identified in the consultation. If robust affordability assessments are to be possible, the availability of sufficient credit data must be such that lenders have a full view of a prospective borrower’s financial position. We therefore support voluntary initiatives taking place from on the part of Credit Referencing Agencies to introduce real-time reporting as well as proposals from the Bank of England for a central credit register. The current paucity of information makes responsible lending decisions extremely difficult.
The full response is available to download on the right hand side.