The chancellor of the exchequer has announced that the government will legislate to introduce a cap on the cost of payday loans.
The cap will be formally established through amendments to the Banking Reform Bill which is currently going through parliament.
The announcement builds on the steps that the government has already taken to help consumers. It has created a new regulator, the Financial Conduct Authority (FCA), with much stronger powers to protect consumers in financial services, and has given the FCA powers to cap the cost of payday loans. This amendment will put a duty on the FCA to use those powers to impose a cap.
To ensure that there is an evidence-based approach to designing the cap, the government is asking the FCA as regulator to use its existing planned work to report on its proposed approach.
Meanwhile, payday lenders are already on notice following the announcement by the FCA of tough new rules they will have to meet next year.
Chancellor of the exchequer, George Osborne said: “We have created a powerful new consumer regulator to regulate the payday lending industry and now we’re asking them to set a cap on the cost of credit. That will make sure that hardworking people are served by the banking system. It is a far change from the situation we inherited, where the industry was almost entirely unregulated.
“We’re going to have a cap on the total cost of credit – we’re looking at the whole package, not just the interest fee, but also the arrangement fees as well as the penalty fees. This is all about having a banking system that works for hardworking people and making sure some of the absolutely outrageous fees and unacceptable practices are dealt with. It’s all about the government being on the side of hardworking people.”
Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents the major short-term lenders operating in the UK, said: “We are surprised by the government’s announcement as we already have voluntary caps on the number of times a loan can be extended and on fees and interest for people in financial difficulty.
“If the objective of the proposed cap is to drive out rogue lenders the Australian experience has had some success, however it has not reduced household debt or the need for credit. Instead there has been an increase in the number of people who turn to the growing illegal lending market, which the Australian regulator has admitted is a problem.
“We look forward to the detailed discussions as to how a cap on the cost of credit will actually benefit consumers in the UK and impact on the availability of flexible credit.”
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