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Payday lending cost cap promised

25 November 2013

The cost of taking out a short term, or "payday", loan is to be controlled by legislation, the UK Government announced today.

Chancellor George Osborne said that fees and charges, as well as interest rates, would be covered by the new provisions, which will be added to the Banking Reform Bill currently before the Westminster Parliament.

The actual levels of cap will be set by the Financial Conduct Authority, which takes over as industry regulator in April 2014. Its current power to set a cap would become a duty under the new measures.

Payday lending companies have been severely criticised for their lending practices, in a market where the main borrowers are those on low incomes who frequently have difficulty paying off their debt. After coming under pressure from the Office of Fair Trading, the main lenders introduced a code of practice, but following claims that this was not being sufficiently observed, in June this year the Office of Fair Trading referred the market to the Competition Commission.

Mr Osborne claimed that the move to legislate would not prejudge the outcome of the Commission inquiry.

Lenders warned that controls might result in more people turning to illegal moneylenders; and the FCA has expressed concern that setting a cap would encourage lenders to charge the maximum permitted.

It is thought that the legislation will not come into force before 2015.

 

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