The UK Government is to introduce a new law to cap the cost of payday loans.
The cap will be formally established through amendments to the Banking Reform Bill which is currently going through Parliament and will be set by new industry regulator, the Financial Conduct Authority (FCA).
The UK Government has said there is “growing evidence” in support of a cap and that lessons were emerging from other countries where a cap had been introduced, such as Australia.
Islwyn MP Chris Evans, a long-standing critic of payday loan companies, said: “I cautiously welcome the Government’s plans to cap the costs associated with this type of lending and I look forward to hearing further details of the proposals.
“I have long supported moves like this but I do think we have to be tread carefully. A cap will not work if it simply drives people into the hands of illegal loan sharks.
“While there is a market for payday lenders, too me the safest way to access affordable credit is through a local credit union.”
Announcing the planned cap, Chancellor of the Exchequer George Osborne said: “We have created a powerful new consumer regulator to regulate the payday lending industry and now we’re asking them to set a cap on the cost of credit. That will make sure that hardworking people are served by the banking system. It is a far change from the situation we inherited, where the industry was almost entirely unregulated.
“We’re going to have a cap on the total cost of credit – we’re looking at the whole package, not just the interest fee, but also the arrangement fees as well as the penalty fees. This is all about having a banking system that works for hardworking people and making sure some of the absolutely outrageous fees and unacceptable practices are dealt with. It’s all about the government being on the side of hardworking people.”
Payday lenders have often been criticised for charging annual interest up to 5,000%.