Payday Loans To Be Capped By Government

The cost of payday loans will be capped under new laws by early 2015, the Government has announced.

The industry has been criticised over the affordability of the loans and the way they are marketed, with critics claiming the firms take advantage of vulnerable people.

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

New financial regulator the Financial Conduct Authority (FCA) will now be forced by the Government to cap the loans.

The Government will amend the Banking Reform Bill currently going through Parliament to formally establish the cap.

The Labour leader has also heavily criticised the industry

The move comes after the Labour leader Ed Miliband spoke out over what he called the "Wonga economy".

Earlier this month he said payday loan companies were "running riot through our communities".

"They are responsible for a quiet crisis of thousands of families trapped in unpayable debt," said Mr Miliband.

Mr Miliband has also called for a ban on payday advertisements during children's television shows, accusing the companies of using "cartoon characters, trendy puppets or cute plasticine figures" to attract children.

George Osborne denied that the move marked a turnaround for the Government, which had initially resisted calls for a cap and denied that Labour had taken the lead on the issue.

The payday loan industry is worth £2bn

He said: "I don't accept it's a departury from any philosophy. The philosophy is we want markets that work for people, and people who believe in the free market, like myself, want that free market to be properly regulated."

He told the BBC Radio 4 Today programme: "The idea that we are following Labour - the Labour Party were in office for 13 years, Ed Balls and Ed Miliband. This issue came up, they were in the Treasury all those years, they did absolutely nothing.

"I am happy to pay tribute to some individual MPs like Stella Creasy, like Robin Walker the Conservative, 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."

However, Ms Creasy 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.

Critics claim affordability checks are not being properly carried out

"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."

Business Minister Jo Swinson warned in September that interest rate caps to tackle payday lenders could mean people who could pay back loans found they could not get credit and turned to "unsavoury alternatives".

The Competition Commission investigation into the £2bn industry is due to reveal its findings next year.

It will be looking at claims that firms are emphasising the speed of the loan over cost and are "skimping" on affordability checks.

There have also been complaints of payday firms unexpectedly draining people's bank accounts through a type of recurring payment called a continuous payment authority.

Payday loan bosses defended their business in front of MPs

The Financial Conduct Authority, which will take over regulation of consumer credit from the Office of Fair Trading (OFT) in April 2014, was already considering new controls before today's announcement.

Among its proposals are unlimited fines, limiting to two the number of times a payday loan can be rolled-over and compulsory affordability checks for all applicants.

Bosses of three payday loan companies, Wonga, QuickQuid and Mr Lender, defended their industry when they appeared in front of MPs earlier in November.

Henry Raine, head of regulatory and public affairs at Wonga, told the Business, Innovation and Skills Select Committee: "Wonga's business is aiming to lend to people who can pay us back, that's how we make money.

"The vast majority of people pay us back on time. We freeze interest after 60 days and 25% of people pay us back early."

Mr Raine said around 3% of loans, equating to around 40,000 of Wonga's 1.25 million customers, go to the 60-day period.

He said Wonga's record compared favourably with the rest of the loan industry, including credit card companies and banks.

The company also made a film telling the stories of 12 of its customers.

Wonga's chief operating officer told Sky News the film was made because "the silent majority of people using our service was not being heard".

He added: "Generally you hear a lot of criticism about our service out in the media and actually the super positive stories that we see every day from our customer feedback are not being heard, so we wanted to redress that balance and allow their voice to come out."

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