In a blow to the booming industry, ministers said that legislation will be introduced to give the new Financial Conduct Authority (FCA) power to intervene in the industry if it sees evidence of bad practice.
The government agreed to add clauses to the Financial Services Bill after realising it faced defeat on a cross-party amendment that called for regulators to sanction businesses if they offer credit on terms that “cause consumer detriment”.
Payday loans – which generally take the form of short-term unsecured debt offered to individuals – have been controversial due to some of the sky-high interest rates charged by lenders.
But lenders say that they provide a valuable service to customers. Market leader Wonga argues that its 4,214 per cent APR is not representative of the actual cost of borrowing small amounts for a short period of time.
Conservative Treasury minister Lord Sassoon warned that while the additional regulation could bring “huge benefits”, it may also reduce access to borrowing for the poor.
Capping the cost of credit and the number of times a loan can be rolled over would be a “major market intervention” and regulators will need to act with care, Sassoon added.