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Payday loans: City regulator to introduce interest rate cap

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25/11/2013
The payday loans industry will be forced to limit the cost of its loans amid claims it is trapping vulnerable borrowers in debt.

The Financial Conduct Authority (FCA) will now be required by the Government to cap interest rates on payday loans.

The cap will be included in the Banking Reform Bill, which is already going through Parliament, however the level of the cap is yet to be announced. 

The payday loans industry has been heavily criticised in recent months over the affordability of the loans, which can exceed 5,000% on an annual basis.

Critics claim the firms take advantage of vulnerable people and the way they are marketed mask the damaging effects of the high interest rates.

The Chancellor, George Osborne, told BBC’s Today Programme that the move would limit the “overall cost of credit” and not just interest rates.

Citizens Advice Chief Executive Gillian Guy said: “This is a cap on the exploitation of people struggling with the rising cost of living. Payday lenders have failed to stick to their own promises to treat customers fairly. The Government’s plan to cap the cost of loans only goes to show how out of control the industry is.

“The extortionate interest rates, hidden charges and lack of financial checks have pushed many payday loan customers into serious financial hardship. As our new figures out today show, three in four people who take out payday loans get into difficulties.

“Citizens Advice has always been clear that any cap on payday loans must be a cap on the total cost of credit. Limiting interest rates alone would allow lenders to pile on excessive costs elsewhere, so the Government is spot on in deciding to tackle the overall cost. Ministers also need to look at opening up the market so there is more choice for consumers.”

Michael Ossei, personal finance expert at uSwitch.com, says that although the cap is a step in the right direction, more needs to be done to make the payday loans industry more transparent and accountable.

He added: “The Government and FCA has to protect vulnerable consumers and must press ahead with tougher action on the marketing practices of these modern day highwaymen to stop the bombardment of adverts and messages promising borrowers a quick and easy cash fix.”

The payday industry has said that a move to cap rates could restrict credit and may encourage illegal lending.

The Competition Commission is currently investigating the payday loans industry and an Office for Fair Trading (OFT) report in September said there were “deep-rooted” problems in the way the loan companies operate.

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