FCA to impose interest rate cap on payday lenders

The Financial Conduct Authority (FCA) has announced it will impose a cap on the amount of interest payday lenders can charge.

In addition, the new regulator will look into the advertisements of these companies, with a view to banning anything seen to be misleading. It will also visit the biggest loan firms to analyse their culture and business models.

The news comes amid mounting criticism about the way short-term lenders conduct their operations, with many people accusing them of sending many households spiralling into debt. High-profile detractors include the Archbishop of Canterbury and Labour MP Stella Creasy, who once referred to them as 'legal loan sharks'.

When it comes into force, the cap will follow the example of countries such as Australia, which already limits the amount of interest payday loans companies can charge. The current level there stands at four per cent per month, with a maximum initial fee of 20 per cent. 

Prime minister David Cameron said the government was assessing the impact such limitations were having in other countries. Caps on the amount of interest short-term lenders can impose also exist in most of the US and some European countries. 

The FCA had previously resisted calls to impose the restrictions, highlighting fears it could drive more people into using loan sharks. This was dismissed by the Treasury, who has placed an obligation on the organisation to use its new powers. 

Martin Wheatley, chief executive of the regulator, commented: "There will be no place in an FCA-regulated consumer credit market for payday lenders that only care about making a fast buck."

Although full details on the limitations have not been released, the government has stated they will affect not just interest rates, but the overall cost of borrowing. Meanwhile, the Labour Party has accused ministers of trying to play catch up, after it announced it would impose a cap should it be returned to power after the next election.

The new restrictions will form part of the Banking Reform Bill, which is currently passing through Parliament. They are expected to come into force at the beginning of next year. 

By Amy White