Government announces cap on payday lending

The Government has announced that it plans to introduce a new law capping the interest charges of payday loans.

The cap which has yet to be set will be decided by the Financial Conduct Authority (FCA), the new industry regulator.

The announcement marks a turnaround in policy as the government and the FCA have previously said that a cap was unnecessary.

The cap has been included in the Banking Reform bill which is currently going through parliament.

A similar cap has been introduced in Austrailia which has limited interest to 4% per month with a single one-off fee at the beginning of the loan being limited to 20% of the overall loan.

Shadow business minister Stella Creasy welcomed the decision but has critised the government for its previous resistance to legislating on the change.

She said: "Just two months ago this Government criticised Ed Miliband for wanting to reform broken markets, and now today we see them following Labour’s lead on the need to act against legal loan-sharking.

"Whether in Parliament or out on Britain’s streets in the Sharkstoppers campaign, we have been making the case that capping is a tried and tested method used in many other countries to tackle the problems caused by payday lenders. For too long David Cameron has ignored our pleas to act and it is cash strapped consumers caught in the spiral of debt these companies generate who have paid a heavy price as a result.”

The chancellor George Osbourne has denied that introducing the was a ‘U-turn’ brought about by Labour’s cost-of-living stance.

Speaking to the Guardian newspaper Mr Osbourne said: "Labour was in office for 13 years. They were in the Treasury for all those years. They did absolutely nothing.

"I am happy to pay tribute to some individual MPs like Stella Creasy and Robin Walker, who have campaigned on this issue but the idea that the Labour leadership who were running this country for 13 years and did nothing in this space took a lead is frankly fanciful,”

Payday lenders such as Wonga have come under fire in for charging several thousand percent in interest on short term loans.

Other concerns have been raised that the industry’s advertising was misleading consumers and had even been targeting children in order to use pester power on their parents.

Responding to the claims Russell Hamblin-Boone, Chief Executive of the Consumer Finance Association, which represents the major short-term lenders operating in the UK, said: “CFA members do not target any specific group of people and certainly not children.

“As responsible lenders, our members comply with seven different pieces of sales, marketing and advertising related laws, as well as specific stipulations in our own Code of Practice.

“Put simply daytime adverts cost less than prime time evening adverts. In the past lenders may have bought advertising for a package of channels, which unbeknown to them, included children’s TV channels, but this was never an intentional marketing tactic. Where contracts allow these adverts have been withdrawn.

“It is irresponsible and wholly inappropriate to suggest that lenders are deliberately targeting children for any purpose.”