Research for the Financial Conduct Authority led to a price cap for payday loans – protecting more than four million payday loan customers from extortionate interest fees.

Impacts

  • Dr John Gathergood worked with the Financial Conduct Authority (FCA) to undertake the world's largest study of the behaviour of households that use payday services, leading to recommendations for setting the level of a loan price cap.
  • FCA consumer credit policy was shaped by the study, helping protect 4.3 million people from irresponsible loan practices in the UK. New FCA regulations came into force in January 2015, limiting interest and charges on payday loans to 0.8% per day and introducing new standards for affordable credit.
  • One year after the introduction of the policy the number of payday lenders dropped from 400 to below 150. The remaining firms withdrew from the market.
  • Within three months of the regulations coming into force, the number of loan-related problems handled by Citizens Advice dropped by 50%.

"In my view John Gathergood is, without peer, the UK's leading expert on the economics of consumer credit markets. He is a vital partner for the FCA now and in the future. John has demonstrated that he delivers, in terms of engaging and useful research output and high-quality communication of the findings, in the context of a practical policy organisation." (Dr Stefan Hunt, Head of Behavioural Economics and Data Science, Financial Conduct Authority)

About the research

Forty-five million consumers use credit and debt products in the UK. Following public pressure to prevent predatory and irresponsible consumer lending, in November 2013 the Chancellor of the Exchequer tasked the Financial Conduct Authority (FCA) to design and implement a price cap on payday lending.

As a leading researcher in the behaviour of households in financial markets, Dr John Gathergood, Associate Professor at the University of Nottingham, was commissioned to produce a study with the FCA to inform the design of stricter regulations for payday loans.

Dr Gathergood worked in collaboration with an FCA team, leading the underlying research about consumer financial borrowing behaviours, especially among people who have difficulty obtaining credit from high street banks. Using methods from econometrics and data science, his analysis included an administrative dataset containing records of 16 million credit card applications. The work evaluated the impact of payday loans on consumers and the anxiety they can cause, providing evidence that was crucial to the introduction of a price cap.

“Research clearly demonstrated that vulnerable consumers of financial services need protection from the lending practices of certain lenders. The introduction of a price cap for payday lending brought an end to excessive pricing, reduced the number of payday loans from 15 million per year to fewer than 8 million and ensured that consumers were protected from spiralling fees and charges,” says Dr Gathergood.

Effectively, the new regulations gave loan companies a choice: those that were willing to provide products and services for the good of consumers could continue, but those that chose not to had to withdraw from the market. Dr Gathergood hopes that in the future, payday loans become the first step towards better forms of credit, rather than the last step on the descent into financial hardship.