Payday lenders will be forced to limit how much they charge under new cost cap published this morning by the Financial Conduct Authority.
The City Watchdog said, from 1 January, interest and fees charged by short-term lenders must not exceed 0.8 per cent per day of the amount borrowed.
On top of that fixed default fees will be capped at £15 and the overall cost of a payday loan should never be more than double the amount borrowed.
The aim is to curb the outrageous spiralling debt of vulnerable borrowers who in the past have seen their loan grow to three or four times the amount they've borrowed once lenders have slapped them with late-payment fees and other penalty charges.
Martin Wheatley, chief executive of the FCA said the cap was not designed to put payday lenders out of business but to ensure that those who used them could afford to repay their debts.
“Our role is to find that balancing point between stopping the excesses which are designed to abuse vulnerable consumers, but still allowing the availability of loans to those who can use them in a mature and responsible way,” he said.
The news comes just a day after the new Wonga chairman was forced to admit that Britain's most-profitable payday lender - it made around £60million last year - would have to cut profits to rebuilt it's tattered reputation.
“We will become a more customer-focused, and inevitably in the near term, a smaller and less profitable business,” Andy Haste said yesterday.
In an attempt to rebrand the contentious company as “acceptable”, Haste - a former boss of insurers RSA and AXA Sun Life – also plans to scrap the high-cost credit company’s TV puppets, which have been branded irresponsible for trivialising debt.
The new cap on the cost of credit will certainly cut profits, but does it go far enough? No, said StepChange Debt Charity head of policy Peter Tutton.
“Capping the cost of payday loans is not a silver bullet. Fixing the many deep-rooted problems of the payday loan market will require a range of measures and assertive monitoring and enforcement by the FCA,” he said.
Citizens Advice Chief Executive Gillian Guy said: “A payday loan cap is not the final piece of the puzzle; consumers need more choice and access to advice.”
But Russell Hamlin-Boone of the Consumer Finance Association, a payday loan trade body, warned that the proposed cap could cause problems.
“It will reduce choice and competition in the market,” he said. “The cap as it's proposed is going to mean that a lot of people with the poorest credit records will not be able to get loans any more.”
But Martin Wheatley said: “There have been many strong and competing views to take into account, but I am confident we have found the right balance.
“Alongside our other new rules for payday firms – affordability tests and limits on rollovers and continuous payment authorities - the cap will help drive up standards in a sector that badly needs to improve how it treats its customers.”