Simon Read: Government's payday loan cap is far from enough

The cost of payday loans will be capped under a new law, George Osborne announced this week. Sadly, he failed to tell the City watchdog which is currently reviewing the high-cost credit sector.

The Financial Conduct Authority (fca) has been forced to hastily arrange meetings in the next few weeks with consumer groups and debt charities to discuss the practicalities of a cap.

The Chancellor apparently caved in to demands to impose a cap in order to avoid a threatened parliamentary rebellion which was backed by the Archbishop of Canterbury, Justin Welby.

The level of the cap is yet to be decided but could well follow the Australian model, where interest rates are capped at 4 per cent month, after a maximum, upfront fee of 20 per cent.

However, behind the political blustering is the fact that it will be more than a year before any cap will be introduced. At a debt discussion I attended in Westminster on Thursday, Christopher Woolard, director of policy, risk and research at the Financial Conduct Authority, revealed that a cap on the cost of payday loans won't be introduced before 2015.

The move also begs the question of whether a cap on the loans will help people avoid falling into debt problems. I don't believe so. The problems with payday lenders stretch far beyond the expensive loans they flog. The key issues surround the widespread lack of responsible lending.

A cap could help cut the cost of credit, but payday lenders should also be forced to introduce robust affordability checks so that people who can't afford to repay the loans don't end up taking one out.

Most of the worst problems caused by the short-term lenders is through people falling into a growing debt spiral caused by interest being charged on interest, while penalty fees inflate the debt to a level that borrowers may never be able to repay.

The sad truth is that many payday lenders often make greater profits from rolling over loans than they do through the original deal. They also put people into financial difficulties by using continuous payment authorities to raid their bank accounts.

So even though the regulators have already announced plans to cut back the number of rollovers allowed and the amount of times that lenders can try and recover their cash from people's bank accounts, the rules need to be introduced quickly.

The FCA can't act until it takes over regulation of credit next April. So the Competition Commission – which is also investigating the sector – should move sooner. Crucially, payday loan advertising needs to be restricted so it doesn't tempt people who can't afford to borrow with their messages of instant loans.

December tends to be a time when payday lenders up their marketing activities towards encouraging people to have the Christmas of their dreams, even if they can't afford it. They should be barred from sending out such irresponsible messages.

s.read@independent.co.uk

Twitter: @simonnread