Chancellor George Osborne has announced that the government will amend legislation to allow the Financial Conduct Authority to introduce a cap on the cost of payday loans.
The government said it has always kept the case for a cap under review as the market has evolved. With growing evidence in support of a cap and emerging lessons from other countries - especially the cap on costs introduced in Australia this year - the government believes it is right to use the opportunity of this legislation for Parliament to be clear on its intention.
The government has discussed and agreed this with the FCA. To ensure that there is an evidence-based approach to designing the cap, the government is asking the FCA to use its existing planned work to report on its proposed approach.
Meanwhile, payday lenders are already on notice following the announcement by the FCA of tough new rules they will have to meet next year.
The cap will be formally established through amendments to the Banking Reform Bill which is currently going through Parliament.
Mr 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 hard-working 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.”