Well done, the Financial Conduct Authority: its new regime for payday lenders may be an intelligent (albeit late) response to a complex problem.
The regulator has not sought to legislate the industry out of existence. That would be absurd since, bizarre as it may sound, there is clearly demand for expensive short-term loans from borrowers who can afford to repay and who prize convenience. Most of these creditworthy individuals would be better off with a credit card. But, if it's a payday loan they want and they are aware of the dangers, it's not the regulator's job to tell consenting adults how to behave.
Instead, the FCA has tried to protect punters whom Wonga et el should not be lending to in the first place – the vulnerable, defined as those who cannot afford to repay. Sensible reforms include: no more than two rollovers of loans; and only two unsuccessful attempts to reclaim a debt.
But the interesting element in the mix is the demand that lenders make thorough checks on affordability. Wonga, naturally, would say it does already. But its default rate last year was 7.4%, which is surely far too high even in a high-risk market. The FCA has not defined an acceptable rate of default – but one hopes it will pursue a substantially lower figure. If nothing improves, the blunter weapon is a cap on interest rates. The FCA should not be afraid to use it.
