Treasury will cap interest on payday loans

The costs associated with payday loans are to be capped under plans to be revealed today. Picture: PA

Chancellor George Osborne said he planned to cap costs on payday loans in a move described by opposition politicians as a “U-turn” on the UK government’s attitude towards the controversial payday lending market.

Mr Osborne said he would task the new Financial Conduct Authority to set a cap on the amount lenders are allowed to charge and added that the body should consider all types of fees associated with a loan.

Consumer groups welcomed the proposals, but warned that strict measures needed to be put in place to ensure loan companies could not bump up fees and hidden charges to plug the shortfall.

“We are going to introduce a cap on the cost of these loans and I mean a cap on all the different elements brought together,” said Mr Osborne.

“It is not just the interest charge, it’s also the arrangement fees and the like, to protect people who take out these loans to make sure they are not being exploited, to make sure hard-working people get a fair deal from the financial system, whether it’s the banks or the payday lenders or internet lenders.

“The consumer authority is going to look at all of this.”

Liberal Democrat business minister Jo Swinson warned in September that interest rate caps to tackle payday lenders could result in “unintended consequences”.

Once a cap is introduced, the UK will be following in the footsteps of other countries, which already have schemes in place to curb the payday loans market.

In Canada, the government introduced a national cap on the total cost of credit, but allows local governments to implement even lower limits in their own area.

Australia has also introduced a cap of 20 per cent on the proportion of upfront fees a lender is able to charge and a 4 per cent monthly interest rate.

Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents the major short-term lenders operating in the UK, said: “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.”

The Money Advice service says around one million people will use payday loans to fund Christmas, while almost one in ten are still paying off debts from last year.

The cap will be included in the Banking Reform Bill, which is already going through parliament.

Richard Lloyd, executive director of consumer group Which?, said: “We’re pleased the government is committed to taking tougher action on payday loans by capping the sky-high fees and charges that drag people down in a spiral of debt.”

The Scottish Government last week launched an advertising campaign encouraging people to use credit unions, claiming they are an “ethical and affordable alternative” to payday loan companies.

Margaret Lynch: Government right to take first step to curb payday lenders

The UK government’s decision to cap the cost of payday loans is a huge step forward in bringing this industry under control. We have been calling for such action for years.

One of the roles of CAS is to put pressure on governments to change legislation on those issues that affect clients we see. It often puts us in the position of challenging ministers with uncomfortable truths. So it is important to give them due credit when they deserve it.

We particularly welcome the fact this initiative is not just about tackling interest rates, but the cost of credit as a whole. That’s the sort of comprehensive approach we have been calling for.

Because it’s important we get this right, contrary to what some say, we don’t want to drive lenders out of business. Far from it. That wouldn’t be in the interests of our clients. All we want to do is make the industry a fair one.

Debt in itself is not an evil thing. It is frankly a fact of life, particularly for many people on low incomes, who need to borrow just to get by. The problem with payday loans is not that they get people into debt but that they get people into unmanageable debt, which takes over their lives and destroys their finances.

In reforming the system the objective should be to curb its excesses, but leave a healthy lending industry.

There are also a number of other issues in the lending industry that still need to be looked at but for now, it’s important to acknowledge this as an important step forward. Governments do get it right, sometimes.

• Margaret Lynch is CEO of Citizens Advice Scotland