Government announces price cap for payday loans

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The government announced this morning that it will cap the cost of payday loans. The level of the cap will be decided by the new regulator, the Financial Conduct Authority (the FCA).

The new cap will be included in the Banking Reform Bill which is currently going through Parliament.

This marks a change in thinking on the part of the government as it had previously published research from the University of Bristol which argued against a general cap. The FCA also indicated in its Consultation Paper issued last month that it did not favour a general cap.

It is also being introduced notwithstanding that the government had already given the FCA the power to impose a price cap on particular products if it felt this necessary.

Explaining the basis for the cap HM Treasury pointed to “growing evidence” in support of the move, including the effects of a cap already in place in Australia.

Speaking to the BBC, the Chancellor, George Osborne, said there would be controls on charges, including arrangement and penalty fees, as well as on interest rates. “It will not just be an interest rate cap,” he told the Today programme. “You’ve got to cap the overall cost of credit.”

Mr Osborne denied the government had a made a u-turn on the issue, and said he was not pre-judging the outcome of a Competition Commission inquiry into payday lending.

“These things can go along in parallel,” he said.

This is a very unexpected move on the part of the government and it is difficult to see how evidence which caused it to completely change its position on a price cap could have been collected since the FCA paper last month.

By ignoring the FCA’s view, and by ordering a cap rather than leaving the FCA to determine whether a cap is necessary, this move clearly compromises the FCA and raises concerns about the potential for the FCA to be used as a political instrument for the government – the OFT was strictly independent of political manipulation by government.

The announcement also cuts across the FCA consultation on its approach to regulation of consumer credit. The deadline for responses to that consultation is 3 December.