Cards and overdrafts in firing line

Cap on payday loans prompts calls for crackdown on equally draconian charges on plastic and current account borrowing, writes Jeff Salway. Picture: Colin Hattersley

The restrictions on the charges that payday lenders can impose on borrowers, set out by the Financial Conduct Authority (FCA) last week, were widely welcomed by consumer groups and campaigners.

But they insist that the regulator must do more to protect consumers from the high cost of other forms of credit, including overdrafts, loans and credit cards.

The payday loan changes, to come into effect in January, will see rates capped at 0.8 per cent a day of the amount borrowed. There will also be a limit on default charges, expected to be set at £15, as part of a total cost cap of 100 per cent of the amount borrowed.

As it stands, a huge chunk of payday lenders’ revenue comes from often extortionate late repayment charges. But the new cap means borrowers will never have to pay back twice the amount they borrowed.

The plans, published three months after the FCA took over the regulation of consumer credit, will force dozens of payday lenders out of business and send some borrowers into the arms of illegal loan sharks, critics said.

But Fraser Sutherland, policy officer at Citizens Advice Scotland (CAS), welcomed the proposals.

“At CAS bureaus across Scotland we see the additional fees, which are hidden at the back of terms and conditions, often being the source of the person’s inability to pay. This new cap will start to move the market into being more transparent and honest to customers.”

However, Sutherland warned that high overdraft and credit card charges have to be tackled by the regulator as well.

CAS bureaus dealt with more than 14,000 overdraft and 32,000 credit card issues last year, compared with the 8,000 borrowers who needed help with payday loans.

“Overdraft and credit card charges are often just as punitive as those charged by payday lenders,” said Sutherland. “While most of these cases involve negotiating payment plans for clients who can’t afford the payments, there were double the number of cases of ‘extra charges’ and default fees regarding credit cards than there were for payday loans.”

The charges levied by banks on short-term overdrafts are often as expensive as payday loans, according to research by consumer group Which? last year. Its study of current accounts from high street banks and building societies found that a one-month £100 overdraft was often more expensive than a loan for the same amount over the same period from the five biggest payday lenders. The costs with the latter mount up when loans are “rolled over” and the late repayment charges kick in.

Sutherland believes the £15 cap on default payday loan charges should apply to overdrafts and credit cards.

“Why does the regulator think that a £30 charge by a credit card company is acceptable but not acceptable for a payday lender? They are both consumer credit products and they both should face the same rules regarding default fees and other such charges,” he said. “The £15 limit is fair and it should apply across all consumer credit products.”

And more needs to be done to help those who get into debt difficulties and turn to high-cost credit, said Sharon Bell, head of StepChange Debt Charity Scotland.

“StepChange is calling on policy makers to consider the idea of ‘breathing space’ – where debtors in difficulty don’t need to keep borrowing to service borrowing, and are instead given a break from interest, charges and enforcement so that debts can be repaid over an agreed period,” she said.

Credit cards accounted  for a third of the debts  owed by Scots who went to StepChange for help last year, while overdrafts made up 16 per cent and payday loans 10 per cent. While for now ruling out a cap, the regulator said overdraft charges will be part of its investigation into current accounts.

But the biggest upheaval could arise from a competition inquiry into the current account market, announced on Friday. The Competition and Markets Authority said the full-scale probe, which could take 18 months, will focus on why banks “don’t seem to be doing a good job of satisfying” their customers.

It warned that complex charges make it difficult for customers to compare current accounts, creating a competition disincentive which could lead to higher overdraft fees.

David Black of Consumer Intelligence said “seismic change” is needed to trigger genuine competition in the current account market.

“One of the issues that challenges consumers is the difficulty in comparing overdraft costs because of the vast array of differing tariffs and structures,” he said.