In Brief

New FCA cap could 'wipe out payday lenders within a year'

Under new rules, borrowers will never have to repay more than twice the amount they borrowed

Payday lenders could be wiped out within a year, analysts have warned, after the City regulator announced a new cap on interest and fees.

New Financial Conduct Authority rules, to come into effect on 2 January, will cap interest and fees at 0.8 per cent a day and cap default fees, the charge for failing to repay the loan on the due date, at £15.

The total cost of a loan will also be limited to 100 per cent of the original sum, meaning that borrowers will never be forced to repay more than twice the amount they borrowed.

The FCA has previously warned that the changes could wipe out 99 per cent of the UK's 400 payday lenders, some of whom have come under heavy criticism for charging extortionate rates of interest.

"All but Wonga, QuickQuid and Dollar Financial, which represent 70 per cent of the market by turnover, are expected to be forced out of business," says the Financial Times.

Dr John Gathergood, an associate professor in economics at the University of Nottingham who has worked with the FCA on the cap, said it may well be the case that there are no high street payday lenders operating in the UK next year as a result of the price cap policy, reports The Guardian.

Russell Hamblin-Boone, chief executive of the Consumer Finance Association, described the cap as the "cherry on a rather heavily-iced cake" and insisted that the industry had already put in place higher standards of conduct.

He told BBC Radio 4's Today programme that borrowers could become vulnerable to loan sharks if payday lenders disappeared.

The FCA said the new rules would exclude around seven per cent of current borrowers, around 70,000 people, from the payday loans market, due to a drop in the volume of loans.

But charity StepChange told the Guardian more consumer protection was needed. It pointed to FCA research showing that 50 per cent of payday borrowers had experienced financial detriment.

The regulator has said it does not want to drive payday lenders out of business. Today, its chief executive Martin Wheatley said he was "confident" the new rules strike the right balance for firms and consumers.

"If the price cap was any lower, then we risk not having a viable market, any higher and there would not be adequate protection for borrowers," he said.

"For people who struggle to repay, we believe the new rules will put an end to spiralling payday debts. For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections."

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