Frontier advised the Financial Conduct Authority (FCA) on the design and level of a price cap on high-cost short term credit (payday loans), aiming to reduce consumer harm from high charges, while avoiding unintended consequences on the availability of credit. This involved analysing and harmonising complex loan-level data from 9 providers, covering 20 million loans and 2 million customers.

Seeing the market from both sides

On the supply side we investigated the impact on firms by creating full loan-level repayments histories and developing algorithms to simulate a provider’s lending decision. This showed whether customers with different credit scores would continue to be served under different levels of the cap and whether providers would continue to be commercially viable or would exit the market. From the customer perspective, by using credit reference agency data to link the same customer at different providers, we noted high levels of customers accessing multiple providers and incurring significant levels of debt relative to the original principal.

Customer savings

The cap was first introduced in January 2015, setting the maximum charge for a customer at 100% of the loan value. In a review two years later, the FCA found positive benefits of the price cap, estimating it to bring annual savings of up to £150m for customers, with limited evidence of unintended consequences.