Payday lenders facing cap on interest profits
Payday lenders will be forced to limit how much they charge under a new cost cap published by the Financial Conduct Authority.
The City Watchdog said that from January 1, interest and fees charged by short-term lenders must not exceed 0.8% 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 came after the new Wonga chairman was forced to admit that Britain's most-profitable payday lender – it made around £60m last year – would have to cut profits to rebuild its tattered reputation.
"We will become a more customer-focused, and inevitably in the near term, a smaller and less profitable business," Andy Haste said.
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.
However, StepChange Debt Charity head of policy Peter Tutton said capping the cost of payday loans was not a silver bullet.