We believe the total cost cap at 100% of the loan is too high and should be closer to 50%, set at 75% at the most. Our arguments are set out below.

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1 For over three years MoneySavingExpert.com has been campaigning for stronger regulation in this industry and we are pleased that a price cap on high-cost short-term credit (HCSTC) will finally be introduced. In particular we have supported the introduction of a total cost cap, rather than a cap on interest rates or APR. It is important to prevent consumers from spiralling into debt and we believe the relatively new and destructive payday loans market has made this worse, while the recently implemented restrictions on rollovers, continuous payment authorities, and affordability checks will significantly help those who have loans. We also believe that the initial and total cost caps play an important role in this. While we understand that some consumers don t struggle with payday loans and prefer to use them, our response focuses on those who encounter difficulties and are faced with no other choice, as well as those who lack understanding of this market. We would like to see the initial cap lower than 0.8% but mainly we do not believe the total cost cap of 100% has been set low enough to mitigate debt spirals and believe it should be closer to 50%. With little data provided by the FCA on a cap set at 50% we have focused the rest of our comments on a 75% cap, but this does not mean we do not think there is potential for the cap to be closer to 50%. From the FCA research and analysis, there does not appear to be a substantial reason why the total cost cap cannot be set at 75%. Even when the FCA takes into consideration the impact on firms as part of its competition remit, at 75% it estimates there will be a minimal impact on lenders. We do not accept the reason for choosing a 100% cap is that it is easier to understand by consumers. Although outside of this consultation, further changes that we would like to see the FCA make in this industry are: To set guidelines on the nature of high-cost short term credit adverts and restrict them being broadcast pre-watershed (by working with the ASA to achieve this). To enforce a delay between the application for and receipt of credit. While there is a 14-day coolingoff period, this is relatively meaningless as the money is received and spent in this time, and capital, interest and fees have to be repaid for this period. Enforcing a delay of one day before receipt of the loan, for example, would give consumers the opportunity to reconsider the application before the level of charges becomes applicable (including those who apply when intoxicated).

2 We would like to see a lower initial cost cap than 0.8% in order to reduce harm to consumers caused by high charges. For example at 0.6%, the amount charged is reduced by 25%. The FCA estimates that the average number of HCSTC loans taken per year by a consumer from any firm is six. If this average consumer took out a 100 loan over 30 days, the amount they would save at 0.6% compared to a 0.8% initial cost cap is 36 per year. This saving has a greater positive impact for the consumer who has had to take these expensive loans, compared to its small impact on the firm s revenue. We understand that at 0.6% the FCA analysed there would be two online lenders and a possible third remaining, although our concern is not about competition but protecting consumers from high costs. The FCA concludes the reason for selecting this level of cap is at 0.8%, there is a possibility that one highstreet firm can continue to provide HCSTC. We don t believe there is a consumer need to keep a highstreet lender. We would ask in what way would high-street borrowers not benefit from losing access to HCSTC, because according to the FCA analysis consumers are not likely to turn to loan sharks but will instead not borrow. Payday lending is a constructed marketplace, not a natural one. We are unconvinced that without this marketplace, in effect, it would be to a great detriment. We believe the total cost cap at 100% of the loan is too high and should be closer to 50%, set at 75% at the most. Our arguments are set out below. We do not accept the FCA s reason that a 100% total cost cap is simpler than 75% as a basis for setting the cap at this level. We believe that a lower cost and better outcome for consumers is a more important reason than being more straightforward. A 75% cap can still be explained to consumers as never having to pay back more than double, with a more detailed example being: Whatever the amount of the loan, you should never have to pay back more than double of what you borrowed. You will ultimately never be charged more than 75% of the loan you took out. As an example, if you borrow 100, no matter what the length of the loan is, the maximum amount you would have to pay back is 175. The FCA states in its consultation that: Firms generate most of their revenues from interest and charges made during the agreed loan duration (or refinancing period). This component of the cap therefore has the greatest impact on their revenues and so makes the most significant contribution to loss of access to HCSTC.

3 As the initial cost cap will have the greatest effect on firms, the total cost cap should not make a material difference in the firms revenues, therefore the FCA s concerns about the number of firms exiting at a 75% total cost cap appear to be unnecessary. The FCA argue that 75% appears too close to levels at which more large firms could exit, which could significantly reduce access. In the FCA technical annexes of the consultation it states that revenues, contributions, customer numbers and the value of lending are factors that are sensitive to the level of the total cost of credit cap. It goes on to state that for each factor at 50% there is a larger reduction than at 75%, 100%, and 200% respectively. The gap between 50% and 75% is larger than the gap between 100% and 200%, and the size of the gap between each total cost of credit cap falls as the periodic cap becomes tighter. The difference in revenue between a 75% and 100% cap was as little as 5%. Further analysis showed that the potential remaining firms under a 100% and 75% total cost cap would both comprise three online lenders. Therefore even the FCA does not estimate there will be a difference in the number of firms exiting under a 75% total cost cap. The FCA mentions a tighter total cost of credit cap of 75% would have a small impact on firm exit results compared to the 100% cap but this is only in respect of other levels of initial cap, not including 0.8%. It therefore acknowledges that the difference in the total cost cap will have no impact on firms exiting at 0.8%, and even at other levels of initial cost cap would have been minimal. In addition, the technical annexes seem to focus heavily on the impact of the initial cost cap, modelling different scenarios and making comparisons, which is in line with it having the greatest effect on firms revenues and customers not in default. The total cost cap can protect customers who do default and this can be achieved by setting this closer to 50%, whilst having an insignificant impact on firms revenues. Interestingly, under a 50% total cost cap the FCA comments it would significantly increase the risk of large firms exiting, however we can see little analysis or modelling of how many firms will exit at this level. The FCA comments that under a 75% total cost cap there would be a strict constraint on the length of loans. It adds that at 75%, loan duration could be restricted to between two and three months and at 100% approximately three to four months. This is a finely balanced judgement, but we consider that a cap that potentially restricts loans to between two or three months does not strike the right balance between limiting excessive charges and providing consumers with options for longer term loans.

4 We would ask why there is a need to offer longer term loans. The total cost cap of 50% would restrict loans to 43 days, a 75% cap would restrict loans to 75 days and a 100% cap would restrict loans to 106 days. The FCA says it has started to see firms offer longer term products of more than one month and the maximum loan duration is typically 3, 6 and 9 months, chosen by the consumer. But for the majority of firms offering single-payment products, the duration is determined by the date of the borrower s next payday, which was generally less than 31 days. The evidence, however shows that consumers are not choosing longer loans. The FCA analysis states the average loan is 260 over 30 days. The three companies which dominate the payday loan market are Wonga, Dollar Financial and Cash EuroNet. The Association of Chartered Certified Accountants (ACCA) May 2014 report on payday lending states that Wonga s average loan length is 17 days. The ACCA report also states that Dollar Financial confirmed in 2012 that in Europe loan terms are typically about 30 days in duration. We would agree with the ACCA s view that payday loans are marketed as short-term, emergency loans to cover unforeseen cash shortfall, so we believe it is unnecessary to offer consumers longer loans, which are more costly than shorter loans. The FCA analysis also showed that only 5% of loans are 60 days or more, as shown in the graph below: We therefore do not believe a 50% or 75% total cost cap would detrimentally restrict consumer choice. We believe the benefits of protecting consumers who default on their loans by charging less with shorter loans greatly outweighs any argument made in this area. Finally, the FCA states our data shows the revenue per day for loans over 60 days is substantially lower than for shorter loans. If this is the case, we would ask how likely is it that lenders will continue offering longer term loans.

5 The FCA consultation says the CMA found that consumers typically are not price sensitive. Related to this, many consumers do not shop around and may be insensitive to prices. We would argue that this makes it even more important to protect consumers with a lower initial and total cost cap as they are not selecting loans on the basis of cost, and the fact there would be minimal impact on firms should be seen as an advantage by the FCA. We calculated the difference between the 100%, 75% and 50% total cost caps for a consumer who defaults: Total cost cap (%) Loan duration (days) Loan amount Initial cap Fixed default charge Maximum default interest charges We have included an example of a 100 loan as the FCA uses this in its illustration of costs. The 260 loan over 30 days is to represent the FCA s calculated average loan. The difference in default interest charges for consumers under both a 50% and 100% cap is substantial: for a 260 loan it is 82% and for 100 this is 72%. The difference in default interest charges for consumers under a 75% and 100% cap is still considerable: for a 260 loan it is 36% and for 100 this is 41%. The FCA found in its consumer survey that 41% of consumers who have used HCSTC regret using loans. Of the 53% who were happy to use HCSTC only 50% report that they would apply for a HCSTC loan in similar circumstances. We disagree with the FCA s conclusion that using HCSTC does not reduce wellbeing or increase financial distress. We have substantial anecdotal evidence from consumers who regret using payday loans, including from those who have not found themselves spiralling into debt: [I m] still paying them off after 2 years never do it I swear it s not worth it! (via Facebook) It's a very vicious cycle that I was in for probably more than year. Glad to be free of it (via Facebook) I have to say it taught me a very valuable lesson, one that I have never and will never repeat. (via Facebook) My son applied for two and got them even though he was on only a part time wage and most weeks no wage at all he can t pay back and they won t help (via Facebook) I've used payday loans in the past, then had to get a DRO because I got into so much trouble. It's [easily] done... (via Facebook)

6 My payday loan spiral started in 2010/11. It started with one payday loan, which I failed to repay on the repayment date due to an unexpected bill. I then thought stupidly to borrow from another lender and again couldn't afford to repay. The amount I borrowed was 1000 from different lenders, but in the end it cost me over (via our forum) I originally got a payday loan because my son was in hospital and it costs me about 30 a day in parking, petrol and food when he is in there! I started off borrowing 120 and have to keep taking it out each month. But with interest it's 175, so I took that out then next month 220 and I am up to 388 because I can't manage without that money each month!" (via our forum) I have accumulated 3 payday loans over the last 12 months, which I can no longer afford to pay back I am hoping somebody can help me. (via our forum) [Payday loans] in my experience facilitate addiction and allow the addict a way of continuing to use beyond the normal point where rock bottom would be hit - at least financially speaking. (via our forum) Although the FCA considers that on balance, the evidence shows harm [is] caused to borrowers who only just qualified for HCSTC, we would argue that those who only just qualify are more susceptible to defaulting. There is therefore a great need to protect these consumers through a much lower total cost cap. Before payday loans, consumers turned to the government discretionary social fund, overdrafts, credit cards, doorstep and high street lenders. Payday loans are a relatively new product and their popularity has increased by the huge boom in marketing, not by a consumer need for them. We don t believe that demand and need are the same. Payday lenders have also used to their advantage the abolition of the discretionary social fund and banks restricting access to credit for consumers. While consumers who no longer have access to payday loans may just not borrow, we believe that as well as the FCA changes in order to protect consumers we also need: More financial education is needed for both adults and children to help budgeting Banks need to take action to provide access to credit for more consumers Alternatives to these products need to be promoted, such as local council support schemes and credit unions. We also believe that the FCA needs to ensure that the recently introduced affordability checks are comprehensive and stringent so only consumers who can really afford to pay back these loans will be accepted. In July 2013 we launched our guide on payday loans and their alternatives. The guide has had 340,000 unique page views since its launch, with an average of 25,000 each month. We recognise that we are only able to reach a certain audience and to effect widespread change, help is needed from the industry and governmental bodies, not just consumer organisations.

7 MoneySavingExpert.com is the UK s biggest money website dedicated to saving consumers money on anything and everything by finding the best deals, beating the system and campaigning for financial justice. It's based on detailed journalistic research, cutting edge tools and has one of the UK's top ten social networking communities. In July 2014 there were over 14 million users a month visiting the site 23 million times and looking at over 64 million pages. Over 9 million people have opted in to receive the free weekly and more than 1 million users have registered on the forum.