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New law gives FCA authority to cap payday loan prices

It has been announced today that the Financial Conduct Authority (FCA) is to introduce a cap on the cost of payday loans.

The government passed a new law today which will give the FCA authority to cap prices, but also introduce new price controls. The cap will be included in the Banking Reform Bill, which is already going through Parliament.

The new law follows highly publicised criticism of some payday lenders for charging more than 5000% on annual interest. Caps have already been placed on payday loans in Australia, where there is a maximum up-front fee of 20% and interest rates are capped at 4% per month.  

However, it has been noted that even with the caps borrowers can still suffer from hefty charges.

Despite the efforts to reduce the negative effects of payday loans, the FCA has indicated that price controls may not work efficiently in consumers interests and could encourage more illegal lending. There is also a fear that price caps may result in lenders increasing their fees to the legal maximum.

Due to the fact that the FCA will not take over as the payday loan watchdog until April 2014, no changes are expected until 2015.

The Chancellor of the Exchequer, George Osborne, told the BBC this morning: “The next logical step is to cap the cost of credit. The FCA is already working on a number of changes to the sector, such as a cap on rollovers and a curb on continuous payment authorities. We’re doing this in a step-by-step way.”

 

Sources

http://www.bbc.co.uk/news/uk-politics-25083701

http://www.independent.co.uk/news/business/news/government-to-cap-interest-rates-and-fees-of-payday-loans-8961642.html

 

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