CHANCELLOR George Osborne announced a surprise cap on payday loan costs yesterday, turning the government’s previous policy towards the short-term lending firms on its head.
In the face of growing pressure from both the Labour party and an influential group of peers including the Archbishop of Canterbury Justin Welby, Osborne now plans to amend the Banking Reform Bill, empowering the Financial Conduct Authority (FCA) to cap the cost of payday loans at an as-yet unspecified level.
The City watchdog’s own guidelines on payday lending were set to be announced in February ahead of it taking control of the consumer credit sector next April, while a Competition Commission investigation into the sector is still ongoing.
Speaking to City A.M, Conservative MP Philip Davies issued a stinging rebuke to his party leadership: “It’s absolutely idiotic ... It’s gesture politics that won’t help anyone. Instead it will put people in a much worse position by removing that credit option from legitimate firms and pushing people towards illegal loan-sharks who go round with baseball bats.”
He continued: “The government is weak and they know it’s stupid – they’ve said as much before. They have caved in to political pressure; it’s difficult to respect decisions that are made on that basis.”
Conservative MP Christopher Chope also questioned the decision, calling the change of heart “a knee-jerk reaction by the government, who seem to be second-guessing the regulator”.
“It’s inconsistent with the line earlier on in the year when the Labour private members’ bill was being read. I’m a bit bewildered about that.”
Last year, the Labour party backed an amendment to the Financial Services Bill by MP Stella Creasy, which would have similarly empowered the FCA to sanction creditors that were judged to cause consumer detriment.
At the time, former financial secretary to the treasury Mark Hoban MP said that the Labour party MP’s amendment risked “distracting the regulator”. Yesterday, Hoban declined to comment.
Industry groups also weighed in on the decision: “We are surprised by the government’s announcement as we already have voluntary cap on the number of times a loan can be extended and on fees and interest for people in financial difficulties,” said Russell Hamblin-Boone of the Consumer Finance Association.
He added that the Australian government’s policy that the Treasury has drawn on could be a dubious model for new rules: “The Australian experience has had some success, however it has not reduced household debt or the need for credit. Instead there has been an increase in the number of people who turn to the growing illegal lending market.”
The Treasury fought back at claims the government had flip-flopped.
“It’s not fair to say this is a U-turn, the cap on payday loans has always been under review and today reflects a growing body of evidence that this is the best way to protect vulnerable people at this end of the market,” said a Treasury spokesman.
Kate McCann, Michael Bird