A radical change of the short-term credit market is needed, the man who advised the FCA on its upcoming reforms has said.
John Gathergood, professor of economics at the University of Nottingham, told the Treasury select committee last Friday that the FCA’s cap on lending charges would not be enough.
He said: “What we want to see is more like a credit ladder, where the first loan may be expensive, but given that the individual has shown it can be repaid and it is affordable to them, then subsequent loans should be cheaper.”
From January 2015, the FCA will impose a cap of 100 per cent on payday lenders’ costs, meaning borrowers will not have to pay back more in fees and interest than they originally borrowed.
Default fees will also be capped at £15, and interest on unpaid balances and default fees must not exceed 0.8 per cent a day of the outstanding amount.
Mr Gathergood was giving evidence last week as part of a Treasury select committee investigation into the treatment of financial service consumers.
He told the committee: “One of the things I have said recently with ResPublica is that the industry as a whole should move to risk-based pricing.”
Right to reply
The FCA was unavailable to comment on this story.