New legislation to establish a cap on the cost of payday loans is to be introduced by the UK government, HM Treasury reported on Monday.
George Osborne, the Chancellor of the Exchequer, has stated that the cap will be formally established through amendments to the Banking Reform Bill, which is currently going through Parliament.
The treasury said that the amendments extend measures the government has already taken to help consumers, which includes the creation of a new regulator, the Financial Conduct Authority (FCA). The FCA has been given stronger powers to protect consumers in financial services and it is authorised to cap the cost of payday loans, however the new legislation will place a duty on the FCA to use its powers to impose a cap. Payday lenders are said to have already been informed that tough new FCA rules will have to be met in 2014.
According to the BBC, certain payday lenders charge over 5,000% annual interest for some loans, however these loans are intended to be short-term, so the annual rate can make charges appear worse than they are. The BBC also reported that the Financial Ombudsman receives more than 50 complaints about poor service from payday lenders every month.
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.”