Payday loan cost cap unveiled by George Osborne | Payday loans

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George Osborne executed a hasty political turnaround, surprising even Liberal Democratic ministers in the coalition, when he ended years of resistance and announced a legal cap on the overall cost of payday loans.

As a sign of the speed of the Treasury’s about-face and the secrecy surrounding the Chancellor’s decision, documents distributed on Friday for Monday’s inter-ministerial ministerial meeting on consumer credit contained no reference to the change in policy.

Labor claimed the move showed the success of its cost of living agenda and exposed the Conservatives’ strategic confusion and weakness, including in Osborne’s own attitude to the role of state in market regulation.

Osborne may think he shot one of the Labor foxes down and done something to dispel the impression that the Tories do not represent low wages.

He presented the move as “a logical next step” to regulate a market unregulated by the previous Labor government, adding that evidence in Australia showed caps on the overall cost of loans could be effective.

The Chancellor said there would be controls on fees, including arrangement and penalty fees, as well as interest rates. “It won’t just be an interest rate cap. You have to cap the overall cost of credit.”

He said the move “would ensure that hardworking people get a fair deal from the financial system, whether they are banks, payday lenders or Internet lenders.”

A possible catalyst for Osborne’s move has been a further push by the backbench Liberals to impose a cap using an amendment to the banking bill in the Lords this week. Earlier this month, the Treasury was given full ministerial responsibility for consumer credit, taking responsibility for the business department.

Another sign of the haste of the decision, the Treasury has not yet presented its alternative amendment.

Osborne said he would place a legal obligation on the Financial Conduct Authority to impose an overall cap on the cost of credit. The FCA already had the power to impose a cap, but would now be forced to do so. The Chancellor said it would be up to the FCA to decide the details of how the cap works.

Osborne made his decision after the Competition Commission had just launched an investigation into the industry.

A Lib Dem source said: “The Lib Dem have been calling for tougher action on payday lenders for over a year – at every step this has met strong resistance from Treasury conservatives . It seems the Tories read the runes on this one and realized that more and more evidence and the political tide was against them. Their change of mind is welcome, but none of these positive actions would not have happened without the Lib Dems in government.

Lib Dem backbench MP Lord Starkey had discussions on his alternative amendment last week with Lib Dem consumer minister Jo Swinson and Chief Treasury Secretary Danny Alexander. Starkey was asking for a maximum cap on the size of a £ 300 loan and admitted he was astonished by Osborne’s decision.

Australia has an interest rate limit of 4% per month, after a maximum upfront charge of 20%. However, even in Australia borrowers can still face fees and late payment penalties can reach double the loan amount.

The Chancellor congratulated shadow consumer minister Stella Creasy on her campaign.

Creasy, the Labor MP for Walthamstow, who campaigned against the practices of the payday lending industry, criticized the government for sending “confusing” signals to the regulator, and said the coalition was “playing catch-up” with Labor, who said they would introduce a cap if they got power in 2015.

In an interview with Radio 4’s Today program, Creasy said the introduction of a cap obligation at this point “would leave the consultation announced a few weeks ago in tatters, where ministers specifically ruled out the decision to ‘introduce a cap’.

Creasy said the regulator told him he was not using his existing powers to cap interest rates in the sector because there was insufficient political will to do so.

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