Financial Conduct Authority must not hand payday lenders a Christmas present

The Financial Conduct Authority never gave the impression that it was entirely comfortable with the idea of capping the charges imposed by payday lenders.

Perhaps that shouldn’t come as a surprise. A lot of the people that work there have a background in economics. If they’re not actually economists they have economics degrees and so they are the sort of people to whom capping prices in a free market is anathema.

It is against that background that Andrew Bailey, the FCA’s chief executive, said in a blog for MoneySavingExpert.com that "we have to be careful that we do not create a market which encourages illegal lending”.

That is an argument that has often been used by the high cost credit industry against capping charges. But easing up on it would be a dangerous move. For a start, the payday loans market never functioned as free markets ought to. There was never any evidence that the companies operating within it competed on price.

Since the cap was imposed, the number of payday loans has fallen sharply, from a rate of 800,000 a month before it was introduced to about 300,000 after it took effect.

It is true that some of the people who might have taken payday loans out when they were more free and easy to obtain might now be getting into trouble through, for example, getting into debt with local councils, utilities, even banks. Some might fall into the clutches of illegal lenders, as Mr Bailey fears. No one wants to see that happening.

But part of the reason for the fall could be that the industry, with its inflated profit margins and aggressive approach to expansion and marketing, was creating a market where one previously didn’t exist. It was making it all too easy to obtain extraordinarily expensive credit and was ending up sucking badly needed resources from the poorest in society.

The fact that some people are getting into trouble with other bodies might be counterbalanced by a lower number of people getting into trouble full stop, which would be a good thing.

There is, in fact, a strong argument that the cap should be extended to other sectors such as rent to buy, in which consumers can easily end up paying three times the headline price for consumer goods they purchase through this method.

It is apt that as the FCA announced its review, Equifax, the credit information expert, published a survey showing 29 per cent of Britons who celebrate Christmas say they feel pressured to spend more than they can afford during the festive season. The rent to buy sector thrives on that pressure, making it “too easy” as did payday lenders before they had their wings clipped.

“Going to illegal money lenders, or loan sharks, means that you are not protected if you find yourself unable to pay,” Mr Bailey opined.

Sadly true. But prior to the FCA’s crackdown the legal payday lending industry’s behaviour didn’t look all that different from those operating outside the law, what with its fake lawyers letters and strong arm tactics that exerted a brutal toll on distressed borrowers.

It’s worth noting, at this point, what Citizens Advice, which frequently finds itself at the sharp end of the problems created by this industry, has had to say.

It thinks that the cap has proven a success, reducing the number of cries for help about payday lenders. It would also like to see the cap extended.

Mr Bailey should heed its call. This is no time to hand to be contemplating handing the purveyors of high cost credit a Christmas Present. To the contraray.