Legislation to cap the cost of fees and interest rates on payday loans is to be brought in under amendments to the Banking Reform Bill currently going through Parliament.
At the moment, charges can exceed 4,000 per cent and there have been calls for tougher controls on the ways some lenders operate, although the industry maintains that the move will restrict credit and could encourage an upsurge in illegal lending.
The level of the cap, which is already being used to some effect in Australia, is yet to be determined but will be decided by the new industry regulator, the Financial Conduct Authority (FCA).
Despite calls for legislation on these loans for some years by pressure groups, the Government has resisted passing any laws, so yesterday’s (November 25) announcement about the cap by the Chancellor, George Osborne, has surprised many commentators.
However, he insisted that the Government is not making a U-turn on the issue and that he is not prejudging the outcome of a Competition Commission inquiry into payday lending.
The FCA already has the power to cap the costs of payday loans but will have an obligation to do so under the new law. However, since the FCA only takes over as the industry regulator next year, no changes are expected before 2015.
The regulator has also proposed a series of measures to clamp down on the industry, including limiting loan roll-overs to just two, and restricting the use of continuous payment authorities (CPAs).
However, the Consumer Finance Association (CFA), which represents some of the payday lending firms, was sceptical about whether price controls would work in consumers’ interests and said experience in other countries shows that the move could encourage more illegal lending.
Mackrell Turner Garrett Solicitors in London
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