Government to cap interest on payday loans

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The government is to impose a cap on the level of interest payday lenders can charge borrowers, performing something of a U-turn after stating earlier this year it would not seek to do so.

City regulator, the Financial Conduct Authority (FCA), has not yet decided what level the cap should be at, but in Australia a cap of 4% is already in place.

The Treasury today told the BBC there is "growing evidence" in support of the move, but in October 2013 the FCA stepped back from announcing an interest cap when it said it would get tough with the sector.

The FCA had said it would limit the number of loan roll-overs borrowers can make to two, and restrict the number of times lenders can pursue a continuous payment authority (CPA) (where money is automatically debited from a customer's bank account) to two.

These rule changes were due to be included in the Banking Reform Bill, which is going through Parliament at present and expected to become law in April 2014. It is thought the interest cap will also be included in the Bill.

A Treasury spokesman told Sky News: "The government has always kept the case for a cap under review as the market has evolved. With growing evidence in support of a cap and emerging lessons from other countries - especially the cap on costs introduced in Australia this year - the government believes it is right to use the opportunity of this legislation for Parliament to be clear on its intention."

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Payday lenders offer short-term, high-interest loans, usually on the understanding that the customer will repay the loan when they receive their next pay cheque.

Some lenders have been criticised for charging excessive late payment fees and sky-high interest rates of 5,000% or more, leading to an investigation by the Office of Fair Trading, which said it had observed "deep-rooted problems” in the way loan firms operate. The Competition Commission has also launched an investigation.

Earlier this month, it was reported that more than one in three people with children under 10 claim their children have been exposed to payday loan advertising to the extent they have repeated advertisement slogans.

Stella Creasy MP, a long-standing campaigner against payday loans, said on BBC Radio 4's Today programme: "The question is whether they mean capping just the charges or the total cost of credit. This industry's 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 costs by expanding the prices at other points they will."

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