Following the recent criticism of some payday lenders for charging more than 5,000% annual interest, Chancellor, George Osborne, has said there will now be controls on charges, including arrangement and penalty fees, as well as on the interest rates charged.
The level of the cap, which has not yet been announced, will be decided by the new industry regulator, the Financial Conduct Authority (FCA).
The Treasury says there is “growing evidence” in support of the move, including the effects of a cap already in place in Australia.
But the industry said the move could restrict credit, and encourage more illegal lending. The cap will be included in the Banking Reform Bill, which is already going through Parliament.
“It will not just be an interest rate cap,” he told BBC Radio 4’s Today programme. “You’ve got to cap the overall cost of credit.” ‘Duty on regulator’ Previously the government had said such a cap was not needed.
But the chancellor denied the government had a made a U-turn on the issue, saying he was not pre-judging the outcome of a Competition Commission inquiry into payday lending.
“These things can go along in parallel,” he said.
Payday loans: check the costs…
- Advertised monthly costs may seem low, but annual rates are significant
- Loans are quick but customer service can be poor. The Financial Ombudsman receives more than 50 complaints about payday lenders every month
- Other lenders like banks or credit unions may offer a better deal.
In Australia there is an interest rate limit of 4% per month, after a maximum up-front fee of 20%. However, even in Australia, borrowers can still face hefty charges. Penalties for late payment are allowed to be as much as twice the loan amount.
In the UK, the FCA has already been given the power to cap the costs of payday loans. But under the new law, the FCA will now have a duty to go ahead and introduce price controls.
“Now the regulator will go away and decide what is the best form of cap,” said Mr Osborne.
The FCA takes over as the industry regulator in April 2014, so no changes are expected before 2015.
Read the full article here, courtesy of the BBC