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Payday loan rates caps to go ahead

A cap on the fees and interest charged by payday lending firms is to go ahead in January in a move to protect borrowers from escalating debts.

The Financial Conduct Authority (FCA) said default fees will be capped at £15 alongside a limit of 0.8% per day on interest on unpaid balances in order to ensure that those who cannot repay on time will never have to pay back more in charges than the amount borrowed.

The latest clampdown on the industry was unveiled by the FCA in July and confirmed today following a consultation period.

FCA chief executive Martin Wheatley said: "I am confident that the new rules strike the right balance for firms and consumers. If the price cap was any lower, then we risk not having a viable market, any higher and there would not be adequate protection for borrowers.

"For people who struggle to repay, we believe the new rules will put an end to spiralling payday debts.

"For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections."

The FCA said that from January 2 someone taking out a loan for 30 days and repaying on time will not pay more than £24 in fees and charges per £100 borrowed.

The moves have been welcomed by consumer groups, although the industry has raised concerns that the crackdown will limit choice for borrowers who will be forced to turn to loan sharks or lenders operating outside the UK.

The FCA estimates that 7% of current borrowers will now no longer have access to payday loans - some 70,000 people - as a result of the payday cap.

It said: "These are people who are likely to have been in a worse situation if they had been granted a loan. So the price cap protects them."

The £2.8 billion sector has come under intense scrutiny amid outrage over the way that some consumers have been treated. Many of the problems found by regulators have revolved around people taking on payday debt they cannot afford, meaning the loan is then rolled over and the original cost balloons.

In the five months since the FCA took over regulation of consumer credit, the number of loans and the amount borrowed has dropped by 35%.

Chancellor George Osborne said: " We created a powerful new consumer regulator to regulate the payday lending industry and legislated to require the FCA to introduce a cap on the cost of payday loans.

"The FCA has now confirmed the cap on the total cost of payday loans - not just the interest rate, but also the arrangement fees as well as the penalty fees - that will come into force in the new year.

"This is all part of our long-term economic plan to have a banking system that works for hard-working people and make sure some of the absolutely outrageous fees and unacceptable practices are dealt with."

Mr Wheatley said he expected the number of payday lending firms to fall as a result of the measures.

He said: "Our modelling was intended to allow companies that have got good business models and ethical standards to be profitable and to be able to continue in the industry.

"That didn't suggest there will be none, it suggested there will be a few but much less than today."

He told the BBC Radio 4' Today programme that banks could meet up to half of the demand, with credit unions and employer loans also playing a role.

"What banks tell me is that they think somewhere between a third and a half of the people who are currently going into the payday loan industry are customers that they would have been able to lend to.

"So I know that they are starting to look at their business models and how they can offer these short-term loans as well to people whose credit history may not be the best but who still are a reasonable risk for them."

Of the 70,000 people who would not get a loan under the new rules, Mr Wheatley said the modelling predicted 2% could go to a loan shark.

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