* Review findings to be published next summer
* FCA will also look at bank overdrafts
(Adds detail, Bailey comment, consumer reaction)
By Huw Jones
LONDON, Nov 29 Britain's financial watchdog has
begun a review to discover whether capped interest rates on
payday lending have driven vulnerable consumers into borrowing
from illegal loan sharks.
The introduction of the rate cap in January 2015 was in
response to concern among lawmakers and the Church of England
about the impact very high interest rates were having on people
taking out short-term loans to tide them over until payday.
The cap, which ensures that no one ends up paying more than
twice the amount borrowed, has resulted in significant
improvements for consumers, the Financial Conduct Authority
(FCA) said on Tuesday, adding that borrowers are now less prone
to falling into arrears.
However, the number of loans has plunged from a rate of
800,000 a month before 2014, when stricter rules were first
introduced, to about 300,000 a month in 2015, when the rate cap
The 2014 rules included tighter supervision, restrictions on
how often loans can be rolled over and on the ability of payday
lenders to take money direct from customers' bank accounts.
Instead of taking out payday loans, more people are getting
into debt with local councils and utility companies or taking
out longer-term instalment loans, the FCA said.
The examination of the cap, the findings of which will be
published next summer, is part of a broader review of high-cost
credit to see if any changes are needed in the way products are
designed, bought or sold.
The watchdog's definition of high-cost credit includes
payday loans, home-collected credit, catalogue credit, some
instances of "rent-to-own" lending for consumer goods, guarantor
loans and pawn-broking.
Motor finance, credit cards, overdrafts and some instalment
lending could also be included, the FCA said.
FCA Chief Executive Andrew Bailey said the watchdog needed
to be conscious of possible side-effects of restrictions to stop
people being ripped off.
"We have to be careful that we do not create a market which
encourages illegal lending," Bailey said in a blog for
MoneySavingExpert.com, a consumer campaign body.
"Going to illegal money lenders, or loan sharks, means that
you are not protected if you find yourself unable to pay."
Banks have also come under the microscope after Britain's
Competition and Markets Authority was heavily criticised by
lawmakers for what they saw as a failure to tackle high fees on
"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 FCA said.
StepChange, a debt charity, said that further FCA action is
necessary to tackle the shift by traditional payday lenders to
instalment loans and welcomed the watchdog's acknowledgement
that overdrafts can act as a form of high-cost credit.
"The need for caps in other markets has already been
accepted, as with payday loans and credit cards," said
StepChange CEO Mike O'Connor.
"There is ongoing consumer detriment from overdraft fees.
Unnecessary delays in action risks further harm to financially
(Editing by Mark Potter and David Goodman)