Putting a Cap on Instant payday Loans

The Chancellor of the Exchequer announced that the government will definitely be introducing legislation to cap the instant payday loans in the payday industry. 2014 will see the Financial Conduct Authority (FCA) taking over regulation of the payday sector. A cap on lending as well as controls on charges, interest rates and penalty fines are to be decided by this new industry regulator. These controls are included in a bill on Banking Reform that is already being pushed through Parliament.

Taking example from controls already laid down in Australia, the FCA now has the power to decide what form of control will benefit the industry as well as consumers. Australia has set an interest rate limit of 4% on payday loans and 20% maximum on the up-front fees, however, there is still no regulation on extra charge and fines. Australian payday lenders can still charge up to twice the loan amount in penalties.

The FCA proposes to crack down on roll-overs, limiting them to 2 and restricting payday firms from drawing money straight from their customer’s bank accounts (continuous payment authorities CPAs).

The government is working on a complete commercial financial make-over. The banking and financial industries are also in the process of getting a serious overhaul.

The Chancellor of the Exchequer, George Osborne says, “This is all about having a banking system that works for the hardworking people and making sure that some of the absolutely outrageous fees and unacceptable practices are dealt with. It’s all about the government being on the side of the hardworking people.”

The Consumer Finance Association (CFA) which speaks for payday lenders, is not quite convinced. The CFA maintains that price controls would just ensure the return of many illegal money lenders who disappeared when payday firms were required to have licensing.

The FCA already has the power to control the payday sector and cap the costs of loans, however under new legislation they will be forced to implement controls and regulation as part of their duty. The FCA officially takes over the payday financial sector as the industry’s regulator in April 2014. Changes are not expected to be felt before 2015.

A spokesman from the CFA said that looking at the examples of strict regulation in other countries, controls only led to the public having less access to credit and illegal money lenders popping up to take advantage of them. Even the FCA regulator itself has doubts about the cap on charges. The cap could work to ensure that most payday lenders hike their fees to the legal maximum.

Other promises of regulations include Mr. Milliband, who feels that taking adverts for payday lenders off of TV when children are watching, or banning payday lenders from setting up shop in town centers would solve the problem.

But here is the problem: People are poor and desperate and are forced to turn any which way to get money to meet their basic expenses. Any kind of credit is expensive but unfortunately people in Britain often have no choice.