For over a year now this website has consistently questioned price caps on payday loans as a bad thing for consumers and a good thing for lenders. We want to break things down and ask just why if lenders have lost hundreds of millions – where is the legal challenge?
We find it absolutely astonishing to believe that there is a group of people out there who claim to be money experts, some of them TV celebrities, some MP’s who celebrate the fact that they have shrank a £1 billion a year industry down to about £200m and think they have won. It’s almost like a scene from Yes Minister where Sir Humphrey makes out he’s lost where he’s really won.
If you start to look at this logically, some of the biggest players in the industry should have just lost £40-£50m a year each in income after the caps. Yet strangely, none of them is willing to throw £50,000 at a Judicial Review - bizarre!
This is strange because the legality of Price Caps is highly dubious. We have looked over the issue and there are several contentious legal arguments that would appear to render the cap unlawful in our opinion.
The FCA is subject to having its decisions questioned in the High Court via the means of a judicial review. The costs are not significant and the potential benefits of it are worth hundreds of millions per year – if you listen to so-called experts.
To be fair to the FCA, the treasury have given very unclear instructions to the FCA that allows the treasury to blame the FCA when this goes wrong. The treasury never said “please implement price caps”, the treasury basically told the FCA to implement caps that ensure XYZ still happen and maybe X isn’t always X and Y isn’t always Y. In other words the treasury has enough wiggle room to blame the FCA if it doesn’t like the results it is seeing – the rest of us would call it sitting on the fence.
So why isn’t there a Judicial Review request – even if it has little hope?
This is where we first rely on our own knowledge of the industry and as we no longer offer these types of loans we can be very open on the subject. However we are speculating for some of it – as we don’t know and we will openly admit that we don’t know. Some of it is based on logic though; take a look at some of our reasoning.
The first reason maybe that the big players in the industry actually like the cap. Just because you hurt payday products, doesn’t mean you hurt payday lenders. The parent companies behind payday lenders usually have side brands that offer 12 month type loans, which earn more profit per customer than payday loans. After all, they roll over 12 times compared to the 2 that Payday products were allowed to roll over before the cap.
By removing the viability of payday products, it forces people onto the types of loans that are more profitable for lenders. The interest rates look lower, but in real cash terms it costs more. It allows the FCA and politicians to say that they brought interest rates in the industry down to 100% from 5000%. Again - totally ignoring the fact that the poor members of the public are now paying more for these headlines and probably lack the education to understand why things are now worse for them.
The second reason (this is almost total speculation): In sort of contradiction to the first reason - Has the FCA given assurances to the industry that the price cap will be raised significantly in 2016-17?
The level of the price cap is set to be reviewed in late 2016, although it appears that it is constantly under review if you follow what the FCA say.
We have contacts in the industry, two of whom appear to be hinting at the fact that the cap will be raised to £40 per hundred, raising maximum charge per loan principle to 200% at the review in 2016 and will the new rate come into effect in January 2017 – if the FCA waits that long. The FCA may act before that date due to the fact that people are being forced onto longer term loans and take out higher valued loans at more costs. Problem being that there is an election on the horizon and nobody knows how this will affect the short term political environment.
If this is true, it could be in both parties’ interests to keep it out of the courts. It could take a year or so to resolve in the courts and by which time the cap maybe effectively over anyway.
There is another indication that the cap won’t last, we are still checking our facts before writing about it but we are reasonably confident that there are solid indications in the public domain that the price cap is temporary.
We have speculated a fair bit about the reasons why there is a lack of a Judicial Review. None of them are positive for members of the public and none of them results in cheaper prices for users. The changes have worked well for lenders in that they make more money, worked well for politicians and FCA in that APR’s have dropped - even though they are now more expensive in cash terms.
The bottom line is that an industry worth hundreds of millions seems to have voluntarily put its head in a noose without a fight – why? If it wasn’t all for show!