Business minister Jo Swinson has warned against using interest rate caps to tackle payday lenders as they could have unintended consequences.
Speaking at a Liberal Democrat fringe event on short term lenders at the party conference in Glasgow last week, Swinson said rate capping could actually harm consumers and not ensure they pay any less.
The FCA will take over regulation of the payday loans sector from the Office for Fair Trading next April and will consult on its new powers by the end of the month.
It will have the power to cap the cost and duration of loans as well as the power to order lenders to repay money to consumers it feels have been treated unfairly.
The regulator has already raised the alarm about using its rate-capping power in a behavioural economics paper and at a Treasury select committee hearing.
Swinson said: “The cap assumes the biggest problem in the industry is rates when there are other areas where the detriment lies. if someone can’t repay a loan then they should not be given it whether it is 10 per cent, 100 per cent or 1000 per cent. That needs to be sorted.
“We also need to be wary of unintended consequences as the evidence shows people who genuinely need credit and can afford to pay it back may suddenly not be able to get credit or turn to more unsavoury alternatives. It could also push up default charges or arrangement fees so you may have a warm fuzzy feeling because the interest rate is lower but people might not end up paying less so we have to be careful.”
Speaking alongside Swinson, Lib Dem MEP Rebecca Taylor also questioned the wisdom of capping interest rates, claiming it has not worked in other countries.
She said: “We need to be very careful about pushing people out of the market entirely. Research in France and Germany, where there are caps, has found a higher rate of exclusion of poor people from short term loans and higher contact with illegal lenders. In Poland research shows payday lenders have found ingenious ways to increase loan costs to get around the cap. Any action taken on interest rates must carefully consider the impact on low income borrowers.”