Amigo Loans, perhaps the UK’s best known provider of guarantor loans, has criticised the Government’s decision to impose a cap on the total cost of credit, primarily on the grounds that it could see an increase in the number of people taking out payday loans.

The Government announced in November 2013 that it would legislate to force the regulator, the Financial Conduct Authority (FCA), to set a cap. The move is aimed primarily at curbing rates charged by payday lenders.

At the time of the announcement, the Chancellor of the Exchequer, George Osborne MP, stressed that the cap would apply to the total cost of credit and not just to the headline interest rate. We’re looking at the whole package, not just the interest fee, but also the arrangement fees as well as the penalty fees,” said Mr Osborne.

Amigo surveyed over 2,000 people, and found that, while 84% support the cap, 12% of respondents in the 18 to 34 age group said that the introduction of a cap would make them more likely to take out a payday loan.

82% of those surveyed thought that it was too easy to obtain a payday loan, while 86% thought lenders should do more to ensure that customers understand the interest payments they will make.

James Benamor, founder and chief executive of Amigo Loans, said: “The government’s cap reeks of gesture politics and while it might go some way to eliminate the crooks in the market, it won’t solve the bigger issues plaguing the industry which is clear guidance on affordability.”

Russell Hamblin-Boone, chief executive of the Consumer Finance Association – a trade body which counts a number of payday lenders amongst its members – had already suggested that the cap would lead to a reduction in access to credit.

Mr Benamor added: “The regulator needs to act urgently and offer clear guidance on affordability, and harsh enforcement against the worst offenders.”

In a webinar of December 2013, Lesley Titcomb, Chief Operating Officer of the FCA, said that the regulator would in due course issue examples of good and bad practice regarding lenders’ affordability assessments in the consumer credit arena. The need to take more care to establish that loans are affordable is just one of a series of new requirements that will come into force when the FCA takes over regulation of the consumer credit market in April 2014.

Other new rules that will affect payday lenders include limits on rollovers and use of continuous payment authority; and the need for risk warnings on promotional material.