The FCA (Financial Conduct Authority) is to execute a cap on the interest rate charged by payday loan companies. The FCA was granted these powers to cap interest rates on payday loans and the Treasury is going a step further to place an obligation on the regulator to use the powers.

Osborne said he was not just introducing a crude cap on interest rates but a cap on the overall cost of credit. He also announced that the banking bill would impose a duty on the new regulator to impose a cap

Payday lenders to face interest rate cap from City regulator

The Financial Conduct Authority (FCA) is to announce plans to cap the interest rates charged by payday loan companies such as Wonga and QuickQuid.

A compulsory interest rate cap had been ruled out by ministers last month when they announced a string of tougher rules for the sector, such as affordability checks on borrowers, a ban on rolling loans over more than twice, and restrictions no what payday lenders can say in advertisements.

The move comes amid heavy criticism of payday lenders for targeting vulnerable customers and charging high interest rates, which can exceed 5,000pc on an annual basis. Justin Welby, the Archbishop of Canterbury, has been among the fiercest critics of the sector.

The FCA has already been granted the power to cap the fees and rates on payday loans, but the Treasury is to go further by placing an obligation on the regulator to use those powers. The new rules are to be included in the Banking Reform Bill, which is already passing through parliament.

Details of the cap have not yet emerged, but George Osborne, Chancellor, told BBC’s Today Programme that the move would limit the “overall cost of credit” and not just interest rates. It will follow similar moves in Australia, where payday lenders face an interest rate cap of 4pc per month, and a maximum initial fee of 20pc.

Last month, David Cameron, prime minister, revealed the government was studying the effect of caps in other countries. As well as Australia, caps on the sector are in place in most of the US and some European countries. Labour MP Stella Creasy, who has campaigned against the payday lending industry’s practices, criticised the government for sending “confusing” signals to the regulator, and said the coalition was “playing catch up” with Labour, who have said they would bring in a cap if they were handed power in 2015.
She said in an interview on Radio Four’s Today Programme that introducing a duty to cap at this stage would “leave in tatters the consultation announced a few weeks ago where ministers specifically ruled out the move to introduce a cap”.

Ms Creasy said the regulator had told her it was not using its existing powers to cap interest rates in the sector because there was insufficient political will for it to do so. But Mr Osborne said the move was not a “philosophical departure” from Conservative free market policies. “People who believe in free market do not believe in complete laissez fair,” he said. “We believe in properly regulated market.”


Original Article:

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Tim Capper

Bringing you financial news and information in plain english for Maple Leaf Financial. My aim is to help readers understand these often complex financial instruments.