No cap on payday loan interest rates hints new government watchdog

The new government watchdog has hinted that it will not put a cap on the interest rates of payday loans because consumers could be 'worse off'.
In a report published yesterday the Financial Conduct Authority (FCA) said that restricting choice for consumers could mean that some are unable to get credit entirely, causing a far greater problem.
Payday loans have been criticised for trapping customers into a spiral of debt with their sky high interest rates – sometimes up to 4,000 APR.

U-turn: New government watchdog, the FCA, hinted yesterday that it won't use new powers to put a cap on payday loan interest rates.

Last year, the government accepted a change to the Financial Services Bill to give the FCA new powers to cap interest rates and restrict the availability of payday loans from April 2014.
However, yesterday's report signaled that the FCA may not use these powers to regulate the industry in such a way. It came in a report on 'behavioural economics' which the regulator said it will take into consideration when identifying areas it should look at.

The FCA said: 'Many consumers use payday loans because, despite high APRs, that is the only source of credit available to high-risk borrowers in emergencies.
'They might be made worse off by caps on APRs or restrictions on how often they can borrow if they reduce availability to some consumers.

Caps: MP Stella Creasy has been campaigning for a cap on the total cost of payday loan credit since 2010.

'Indeed, usury laws and similar provisions have been cited as an example of regulatory failure
driven by regulators’ own behavioural biases.'
The current payday loan regulator, the Office of Fair Trading, launched a crackdown on the industry last month.
The OFT ordered 90 per cent of the industry to change their business practices – if companies fail to comply they will face losing their consumer credit licenses.
A cap on payday lending rates has been championed by Labour MP for Walthamstow Stella Creasy who has been campaigning on the issue since 2010.
Last week, she said: 'For too many consumers, the only people who will lend to them at the moment are these legal loan sharks. There is no competition for their business. That is why a cap on the total cost of borrowing makes more sense than relying on affordability assessments which leave lenders to decide what consumers can pay.
The Government is clearly out of touch with the way this industry works and is giving it a free pass to push millions more into debt by not setting out what a is fair price for credit as they do in most other countries.'