Payday loan companies could have their interest rates capped by the new financial regulator after the Government agreed to an amendment of the upcoming Financial Services Bill.
Payday loan companies, such as QuickQuid, Wonga and Payday UK, have drawn heavy criticism for charging annual interest rates of up to 4,000 per cent a year. The firms have been accused to pushing vulnerable people into debt.
Lord Welby, the incoming Archbishop of Canterbury, recently said that some payday loans are "usury" and claimed that curbing them was a "moral" issue.
After a day of political manoeuvering, the Government said that it will give the new financial regulator the Financial Conduct Authority (FCA) the power to cap the interest rates charged by payday lenders.
The move was announced by Lord Sassoon, a Treasury minister, after Labour peer and shadow business minister Lord Mitchell put forward an amendment to the Financial Services Bill.
The amendment was backed by peers including Lord Welby and Baroness Grey-Thompson, the Paralympian, and could have led to a Government defeat in the Lords.
However Lord Sassoon said if Lord Mitchell withdrew his amendment, the Government will introduce its own amendment when the Bill has its third reading next week.
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 praised the minister's "very welcome statement of intent".
He told peers: "This issue is now where it should be - beyond party politics. The winners are those who have tirelessly campaigned for this change in the law and I must mention Stella Creasy MP, who has been relentless in her pursuit of justice.
"The other winners are those who live in the hell-hole of grinding debt. Their lives will become just a little easier.
"The losers are clearly the loan sharks and the payday lending companies. They have tried every trick in the book to keep this legislation from being approved and they have failed. Their failure is our victory."
A Treasury spokesman said that the Financial Services Bill had contained provisions to allow the FCA to cap payday loans when it was first laid before Parliament in January. However he said that the Government’s amendment will make this power stronger.
Chris Leslie, Labour and Co-operative Party MP for Nottingham East, told Twitter: “Faced with certain defeat in the Lords, the Treasury looks set to accept Labour’s amendment to protect consumers from extortionate interest rates. But it shouldn’t have taken 9 months since we tabled amendment in the Commons for the Government to cave in and tackle high cost lending.”
Earlier this month the Financial Ombudsman Service (FOS) said that it had seen a significant rise in the number of complaints about payday loan firms. The FOS, which resolves disagreements between companies and individuals, currently finds eight out of ten payday loan complaints in favour of the consumer.
The FOS said the main complaint was that the loan was unaffordable and should not have been granted in the first place. Other reasons were that the charges were too high and that the loan provider would not accept a suitable repayment plan.
The Office of Fair Trading (OFT) recently called for the worst offending payday loan companies to be shut down if they are not adhering to its so-called Irresponsible Lending Guidance.
The OFT guidance said creditors should treat borrowers fairly, be clear about what they are doing and give borrowers 'reasonable' time to repay the loan varying dependent on the borrower's circumstances.
In response to the OFT’s comments, Wonga said that it has “consumer safeguards” in place and said that it “rigorously” credit checks all applications. The firm said that it declines two-thirds of first-time applicants, who are limited to a loan of £400.