Out-Law News 1 min. read

Proposed payday loan restrictions could result in more bank provision of short term loans, says expert

Consumers looking for short-term credit may increasingly go to their banks for those loans in future in light of planned changes to the way the 'payday' loans market is to be regulated, an expert has said.

Banking specialist Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said that banks may gain more of a foothold in the payday loans market after the Financial Conduct Authority (FCA) set out proposed restrictions on the charges that payday loan companies can apply (141-page / 2.83MB PDF).

Earlier this week the FCA launched a consultation on plans to prevent payday loans companies charging more than 0.8% of the amount being borrowed in daily interest and fees, beginning next year. It also proposed to cap the fees that payday loans companies charge if borrowers default on repayments. The fixed default fees must not exceed £15, although companies can still charge interest on those loans.

The regulator, however, has proposed that an overall cap should be applied on the cost of loans to consumers, meaning that borrowers would not have to pay more than double the amount they borrow in the form of interest, fees or default charges.

Financial service litigation expert Michael Ruck of Pinsent Masons warned that the proposals would deter payday loans companies from operating in the market and "lead to a direct reduction in the credit available to those who may be considered to need it most".

Tony Anderson said, though, that consumers may turn to traditional banks for short term credit if the proposals are followed through following the FCA's consultation, which closes on 1 September.

"There is a certain logic to banks occupying this market," Anderson said. "It provides more of a safety net to borrowers who will be able to look to a more complete regulatory framework for banks to obey as well as the added comfort that in the current environment, banks will be loathe to place their reputations at risk whilst operating in this space."

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.