The government bows to pressure and agrees to cap the fees and interest pay-day lenders can charge to stop borrowers getting into even more debt
Today, the government announced that payday loans companies will have the amount they can charge for fees and interest capped to stop them from charging huge amounts of interest or fees, which force borrowers into even higher debt.
The cap will be independently set by the new regulator; the Financial Conduct Authority (FCA) once the Treasury introduces a new law. In the past the Tories have criticised proposals that involve direct intervention into the financial markets, however last year Treasury minister Mark Hoban MP said that while the government supports the FCA’s right to regulate credit charges, it deemed a law to cap the cost of pay day loans were “not necessary”
Announcing the new law this morning, Mr Osborne told BBC Radio Four’s Today programme that he “doesn’t accept” that this marks a departure from the philosophy of free market.
Osborne stated: ‘that capping of the overall cost of credit for those taking out payday loans was part of the process of fixing all parts of the banking and financial system” but denied it was a departure from a free market economy.’
Osborne added: “it will not simply cap the rate of interest but the overall cost to a person taking out a pay-day loan. We’ve always believed in properly regulated free markets where there is competition but consumers are protected, that’s why I have created a new consumer regulator.”
He added: “It is not just a cap on the rate of interest I think it is important we understand that. We have got to look at all the other things that go into a loan, the arrangement fees the penalty fees if you fail to pay the loan, the rollovers the continuous payment authority – that the money coming out of people’s accounts without people knowing.”
The Government says there is “growing evidence” in support of the move, which will be included in the Banking Reform Bill already going through Parliament, such as the effects of a cap already in place in Australia.
Labour, in preparation for the general election next year had already promised if elected they would not only implement a cap on pay day loan, but has also pledged to give councils new powers to limit the spread of payday lending shops in town centres.
Stella Creasy, the Shadow Business minister said that the “devil is in the detail” in capping payday loans effectively. She said: “The Government is now talking about capping the cost of credit, something we have been calling for for several years now. The question is whether they mean capping just the charges or actually the total cost of credit.
“This industry is a bit like an inflated balloon and if you don’t crack down on the whole cost of credit then wherever they can recoup their cost by expanding their prices at other points they will.”
On the flip-side, Vince Cable has warned that there was evidence that capping payday loans could drive people into the arms of illegal loan sharks.
Cable told BBC news: “There is evidence in both directions here, in the United States they have introduced caps on interest rates that seem to work, on the other hand we commissioned a report from the University of Bristol that warned about the dangers if it’s not done carefully of letting the baseball bat brigade into this industry.
“So it’s got to be very, very carefully done, but the Chancellor and the Government in general have clearly listened to the people campaigning for the interest rate cap and are now taking action on it.”
Responding to the Chancellors announcement today, Mathew Lawrence, IPPR Research Fellow, said: “With over a million people expected to use costly pay day loans to pay for Christmas, this can’t come soon enough.
But to ensure credit is affordable for all, a cap on the cost of payday loans must also be accompanied by new alternative, cheaper and more sustainable ways of borrowing.
To be effective, the cap itself must be inclusive of the total cost of a loan, to stop the lender passing it on in higher fees or hidden charges.”