UPDATE 3-Britain's payday lenders hammered by rate cap

Tue Jul 15, 2014 10:09am EDT

* Interest on loans must not exceed 0.8 pct per day

* Default fees cannot exceed 15 pounds

* Cost of a payday loan cannot exceed amount borrowed

* Lenders will lose 42 pct of revenue - FCA

* Citizens Advice says banks must offer alternatives (Adds comments from lawyer, details of UK payday lenders)

By Matt Scuffham

LONDON, July 15 (Reuters) - New rules will cap sky-high interest rates offered by payday lenders in Britain, bringing down the cost of short-term loans criticised for causing misery among borrowers and potentially wiping out almost half the companies' revenue.

Payday lenders, which offer to tide borrowers over until they receive their salary, have been accused of charging exorbitant fees and tipping households into a spiral of debt. Britain's biggest short-term lender Wonga charges an annual interest rate of 5,853 percent, according to its website.

The Financial Conduct Authority (FCA) said that, from January 2015, the interest and fees on new payday loans must not exceed 0.8 percent per day of the amount borrowed. Firms are currently charging 1-2 percent per day, it said.

Fixed default fees cannot exceed 15 pounds ($25.52), under the new rules, and the overall cost of a loan must not exceed the amount borrowed.

Lenders will lose about 42 percent of their revenue, or 420 million pounds per year as a result of the cap, the FCA said. It estimated consumers would save on average 193 pounds per year, or 250 million pounds ($425.4 million) a year in total.

Payday loans have grown in popularity in Britain since the 2008 financial crisis, which left banks less willing to offer temporary credit and poorer families struggling to cope with rising living costs and low growth in wages.

Politicians from all parties are keen to position themselves on the side of low-income families ahead of a general election in 2015 and have been pressing for a clampdown of the industry.

"The government is absolutely determined to ensure that customers are protected from unfair payday loan costs," a spokesman for Britain's finance ministry said on Tuesday.

Payday lenders have been preparing for more rigorous controls since the British government asked the FCA to take over supervision of the industry in April following accusations of shoddy treatment of customers by some firms.

Wonga has recruited financial services industry veteran Andy Haste to oversee changes at the business which was fined last month for sending bogus letters from non-existent law firms to customers struggling to make repayments.

It is not the only firm to have been embroiled in scandal. U.S. payday lender Dollar Financial, which trades in Britain as The Money Shop, on Monday agreed to refund 700,000 pounds in interest and default charges to customers who were loaned too much money.

In the United States, Cash America was ordered to refund customers $14 million and pay a $5 million fine to settle allegations it improperly pursued some customers debt and overcharged military service members.

MAGNET

A report last year by Britain's Centre for Social Justice said around half of payday loan users had taken out the loans because they had no other access to credit. It also said the cost of living had risen by 25 percent in the past five years, driven by increases in rent, gas and electricity bills while real wages had fallen to the levels they were in 2003.

Opposition Labour lawmaker John Mann said the FCA's measures would "make a significant difference to those people reliant on payday lenders and bring some much needed regulation to this area of the financial services market".

However the Consumer Finance Association, which represents the payday lending industry in the UK, has argued that similar caps in other countries such as France and Germany have forced borrowers to turn to illegal lenders.

The previous light-touch regulation of the industry had made Britain a magnet for U.S. lenders such as Dollar Financial Group, which owns The Money Shop and PaydayUK and Cash America, which trades as QuickQuid, as well as Wonga, founded by South African entrepreneur Errol Damelin, and many smaller operators.

Emily Reid, a partner at international law firm Hogan Lovells, said the bigger lenders would be able to adapt their businesses to meet the new requirements and take advantage of smaller players being unable to do so.

"The larger companies are quite likely to see this as an opportunity because the tightening up of the rules will force quite a few people out of the market. They have the resources and the willingness to work within the rules," she said.

Shares in Cash America were up 1.2 percent at 1340 GMT.

Wonga declined to comment on Monday. Dollar Financial and Cash America could not be reached for comment.

When it took over supervision of the industry, the FCA said up to a quarter of payday lenders could exit the market as a result of stricter rules. Edinburgh-based Cheque Centre and Barnsley operator QuickLoans.co.uk have already said they will stop selling payday loans.

The Citizens Advice Bureau, a charity that helps people with legal and financial issues and had previously accused payday lenders of bullying their customers, said borrowers needed more choice in short-term lending and called on banks to offer short-term loans as an alternative to payday lenders.

($1 = 0.5877 British Pounds) (Additional reporting by Sophie Sassard, Kate Holton and Carmel Crimmins; Editing by Pravin Char)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (1)
njglea wrote:
This is still ludicrous, “the overall cost of a loan must not exceed the amount borrowed.” 100% interest? Shut them all down.

Jul 15, 2014 10:18am EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

A tourist takes a plunge as she swims at Ngapali Beach, a popular tourist site, in the Thandwe township of the Rakhine state, October 6, 2013. Picture taken October 6, 2013. REUTERS/Soe Zeya Tun (MYANMAR - Tags: SOCIETY) - RTR3FOI0

Where do you want to go?

We look at when to take trips, budget considerations and the popularity of multigenerational family travel.   Video