Victory for payday loans campaign as ministers agree crackdown on charges

Lenders who fail to obey new rules could find loans are made unenforceable and don't need to be repaid

The Government agreed tonight to crack down on the charges and unscrupulous practices of high-cost credit companies in a major victory for payday loan campaigners.

Facing defeat in the House of Lords over a crucial payday loan vote, ministers backed down and decided to undertake a “clean up” of the system.

The move follows months of campaigning by The Independent to introduce controls on the activities of rogue lenders who prey on the vulnerable.

Unscrupulous lenders encourage people who cannot obtain credit to take out loans with high charges which they cannot afford to repay. The net effect is that they end up in a debt cycle where they are forced to borrow just to repay their loans, often with disastrous consequences.

To curb lenders' excesses, Labour peer Lord Mitchell had proposed an amendment to the Financial Services Bill to cap the cost of payday loans.

During the debate, the Archbishop of Canterbury-elect, Justin Welby, who had supported the amendment, said rates charged by payday lenders were "clearly usurious".

In accepting the defeat, Lord Sassoon, the Commercial Secretary to the Treasury, promised to introduce a new amendment which would "cover both the total cost of credit and the total duration of credit". "This is a critical area that needs cleaning up," said Lord Sassoon, a former investment banker, adding that the amendment would be prepared in time for the third reading of the Bill next Wednesday.

The rules will give the Financial Conduct Authority – the new City regulator taking over next year – greater powers to protect consumers from extortionate interest rates and unscrupulous practices. Many payday lenders charge 4,000 per cent APR or more in interest and have been known to target people on benefits or students.

The Treasury last night promised that the FCA will be able to crack down on questionable practices such as rolling over loans indefinitely, which can leave people owing 10 times what they borrowed. The regulator will also be given powers which would mean that, if lenders failed to stick to the rules, loans could become unenforceable – which could mean they would not need to be repaid.

The FCA is set to take over regulation of the high-cost credit sector in 2013 with the new powers set to be enforced by 2014, according to Treasury estimates. Stella Creasy, the Labour MP for Walthamstow, who has led a campaign to end legal loan sharking, welcomed the news, but said the new amendment must include a cap on the cost of payday loans.

Yvonne Fovargue, Labour MP for Makerfield, who has also campaigned against payday lenders, warned that the battle to control their excesses continues. "Charges are just one part of the problem," she said. "There need to be limits on the use of continuing payment authorities, which allow lenders to dip in and out of borrowers accounts at will. One of my constituents had her bank account wiped out just before last Christmas while another saw a payday lender make 20 withdrawals in a day."

But the Shadow Financial Secretary to the Treasury, Chris Leslie, criticised the Government for taking so long to agree to the crackdown.

"It shouldn't have taken nine months since we tabled this amendment for the Government to cave in," he said. "A growing number of people from across the political spectrum have been uncomfortable with the Treasury's refusal to take tougher action – so this change of heart is welcome news."