The Government has caved in to cross-party demands to cap the cost of credit for payday lenders by amending the Financial Services bill days after the industry introduced a new enhanced code of practice.
Under the proposals the Financial Conduct Authority will have the power to cap the cost and duration of credit for short-term loans.
A Labour-led amendment proposed by Lord Mitchell and backed by Bishop Justin Welby, the next archbishop of Canterbury, meant the Government was facing defeat in the House of Lords.
Commercial secretary Lord Sassoon said: “We need to make sure the FCA grasps the nettle when it comes to payday lending and has specific powers to impose a cap on the cost of credit and ensure that the loan cannot be rolled over indefinitely should it decide, having considered the evidence, that this is the right solution.”
Lord Mitchell said: “The most welcome winners are those who live in the hellhole of grinding debt. – their lives will become just a little easier. The losers are clearly the loan sharks and the payday lending companies. They have tried every trick in the book to keep this legislation from being approved and they have failed.”
At the Liberal Democrat annual conference in September, deputy chief whip Lord Dick Newby said the Government was prepared to regulate the sector if it did not abide by a tough new voluntary code.
The code, which was introduced by the Consumer Finance Association at the beginning of last week, “encompasses and exceeds” the good practice customer charter which established a minimum set of standards in July. It asks lenders to: offer clear information on loans, carry out sound affordability assessments and notify customers three days in advance of recovering payments.
Last month the Office of Fair Trading opened a formal investigation into over 50 payday lenders over aggressive debt collection practices, days before the Consumer Finance Association introduced an enhanced code of practice, although it is voluntary.
Consumer Finance Association chief executive Russell Hamblin-Boone says: “The CFA welcomes any move which promotes best practice and responsible lending in the payday industry, and drives out rogue lenders. As responsible lenders, we continue to make great strides forward in setting higher standards in the payday industry.”