FSA proposes interest rate cap

The FSA is proposing a cap on the interest rates lenders can charge for credit-impaired mortgages.

The discussion paper on Product Intervention released last week, the FSA gives the examples of capping risk-based charges such as the level of interest charges on impaired credit mortgages, however they admit that it’s difficult to get it right.

It also proposes capping the amount lenders could charge those in mortgage arrears.

It says: “Price capping may be a means of tackling the most serious cases of mass consumer detriment, where firms are making excess profits by exploiting a lack of consumer sensitivity to, or awareness, prices. In such cases, it may be appropriate and feasible to cap prices.”

But the paper adds: “If we do consider this option in the future, it may be as an interim measure in extreme circumstances, until a more finessed approach, using other regulatory tools, can be formulated.

“This may not necessarily require an extensive exercise to determine the most appropriate price, but a short-term measure to find a price that is sufficient to reduce incentives to help stop a particular problem growing while a permanent solution is put in place.”

The FSA also acknowledges that there are numerous difficulties in enforcing price caps and that it is a blunt tool.