Interest charged on loans offered by payday lenders in Britain will be capped at 0.8 percent a day from January after lenders were blamed for causing misery among borrowers. Ciara Lee reports.
They're accused of causing misery for borrowers, but now payday lenders are to be capped. The UK Financial Conduct Authority is introducing a maximum loan rate of 0.8 percent a day. It means nobody willl have to pay back more than twice what they borrowed. Default charges will also be reigned in. Payday lenders offer to tide borrowers over until they receive their salary. Anti-poverty campaigners say the sector has grown sharply in recent years thanks to cost of living rises and banks cutting back on lending. Martin Wheately is the FCA Chief Executive. (SOUNDBITE) (English) MARTIN WHEATELY, CEO OF THE FINANCIAL CONDUCT AUTHORITY, SAYING: "This whole industry is built around borrowing relatively small amounts for a small time period. We expect that most of the industry's profitability will be taken out, that many firms will not find that they can make profits at this level, but that there will still be enough in the industry to provide a service." Critics say that squeezing the payday loan companies could force people into the arms of illegal loan sharks. (SOUNDBITE) (English) MARTIN WHEATELY, CEO OF THE FINANCIAL CONDUCT AUTHORITY, SAYING: "In practice, very few people say they would actually use a loan shark. So when we asked people, they're aware of them and know the risks of them, the vast majority said they wouldn't touch them." Britain's biggest short-term lender Wonga charges an annual interest rate of 5,853 percent. Such exorbitant fees have pushed some households into a spiral of debt. Credit Suisse's Bob Parker, welcomes the action. (SOUNDBITE) (English) BOB PARKER, SENIOR ADVISER, CREDIT SUISSE, SAYING: "It is definitely a good thing and I think one area which the Financial Conduct Authority in the UK has looked at and has looked at and is right to look at us the very aggressive selling tactics of some of the pay day lenders and also their extremely high interest rates." The payday loan industry is worth around 2.8 billion pouunds and is expected to shrink as a result of the action. Advice groups say high street banks should seize an opportunity and start offering smaller loans.