The Government has announced plans to allow the UK’s new financial regulator the power to cap interest rates on payday loans. Many parliamentarians have campaigned vigorously against the rates charged by payday lenders, which can exceed 4,000% APR.
In April 2013, it is expected that the Financial Conduct Authority (FCA) will take over most of the responsibilities for overseeing the conduct of financial services firms that currently lie with the Financial Services Authority. In April 2014, it is anticipated that the FCA will also take on the responsibility of regulating the consumer credit industry from the Office of Fair Trading.
The proposed amendment to the Financial Services Bill – the legislation that will provide for the setting-up of the new FCA – will allow the regulator to intervene on the issue of interest rates if it believes it is appropriate to do so.
Lord Sassoon, a Treasury minister, announced that the Government would be taking this step in late November 2012. Labour’s shadow business minister Lord Mitchell had previously proposed his own amendment to the Bill, which would have provided for an automatic cap on interest rates, with his supporters including Lord Welby, the new Archbishop of Canterbury.
Lord Welby drew a spiritual parallel in making the case for legislation. “The rates are clearly usurious, to use an old fashioned expression. It used to be said in the old days that you couldn’t take away people’s beds and cloaks because they were essential for life. That is the Hebrew scriptures. Today, there are equivalent things being taken away as a result of these very high rates of interest. It’s a moral case which is bad for us, bad for the clients, bad for all of us in this country when it is permitted to happen,” said Lord Welby.
The Government has committed to introducing its amendment provided Lord Mitchell agrees to drop his amendment. It was believed that had Lord Mitchell’s plans been debated in the House of Lords that the Government could have been defeated.
Lord Sassoon said: “We need to ensure that the Financial Conduct Authority grasps the nettle when it comes to payday lending and has specific powers to impose a cap on the cost of credit and ensure that the loan cannot be rolled over indefinitely should it decide, having considered the evidence, that this is the right solution.”
Lord Mitchell described the Government’s move as a “very welcome statement of intent”.
Stella Creasy MP has previously described payday lenders as ‘legal loan sharks’. However, payday lenders have argued that they actually operate on very low profit margins, and that the use of APR – compulsory in all consumer credit advertising – is inappropriate for short-term lending.
Payday lenders are also coming under increased regulatory scrutiny, with their business practices having also attracted adverse comment. Even before the FCA commences regulation of short-term lending in 2014, current consumer credit regulator the Office of Fair Trading has said it intends to issue warnings to the majority of the 50 lenders it inspected in its recent compliance review. Payday lenders who are members of one of four trade associations are now also subject to a new Good Practice Customer Charter.