Britain’s banking watchdog has announced new rules to curb the high rates of interest that payday lenders are notorious for.
The Financial Conduct Authority (FCA) has proposed that from the beginning of next year interest and fees on new payday loans should be capped 0.8% per day of the amount borrowed, £15 for fixed default fees and no more than 100% of the amount borrowed in overall interest and fees.
Martin Wheatley, the FCA’s CEO, said: "For the many people that struggle to repay their payday loans every year this is a giant leap forward.
"For those who struggle with their repayments, we are ensuring that someone borrowing £100 ($171) will never pay back more than £200 in any circumstance."
The FCA estimates the new measures will save consumers £193 on average per year, or £250m overall.
Lenders stand to suffer the loss of 42% of their current revenues or £420m per year, according to the regulator.
However, Wheatley said the measures were not intended to put payday lenders out of business: "Our role is to find that balancing point between stopping the excesses which are designed to abuse vulnerable consumers, but still allowing the availability of loans to those who can use them in a mature and responsible way."
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The UK payday loans market is currently worth around £2.8bn ($4.76bn) annually and encompasses around 200 consumer credit firms that lend to borrowers on a short term basis.
The finalised rules will be published in November and affected firms will have until January to roll out the changes, the impact of which will be reviewed in two years’ time.
Since their rise to popularity, payday lenders have been frequently pilloried by public figures, including in one notable instance the Archbishop of Canterbury.
The spiritual leader of the Church of England launched a scathing attack on payday lenders, particularly the UK’s biggest payday lender Wonga.
The Archbishop called the firm’s operations "morally wrong" and vowed to drive them out of business by supporting alternative sources of borrowing like credit unions.
Talking to then Wonga boss Errol Damelin in July 2013, he is reported to have said: "We’re not in the business of trying to legislate you out of existence; we’re trying to compete you out of existence".
Archbishop Justin Welby was then embarrassed to find out that the Church of England had an indirect stake in Wonga.
Although a small investment, amounting to less than £100,000 in the church’s total investment portfolio of about £5.2bn, the tie nevertheless put the church in an awkward position.
The Church of England announced earlier this month that it had cut ties with the lender, removing a small indirect investment exposure to Wonga from the church’s investment portfolio.
The church was unable to immediately divest itself of the stake, as that would have involved selling its entire venture capital portfolio at a loss of somewhere between £3m to £9m.
Edward Mason, the head of responsible investment for the Church Commissioners, said the group had "managed to find a way to remove exposure to Wonga only from a pooled fund".
The Anglican Church made no profit on the investment, news welcomed by Welby.
"I’m absolutely delighted that we are now out of Wonga and have taken no profit from it," he said.
Wonga has also been the subject of controversy during the last month after being forced to pay out a cool £2.6m ($4.4m) to its customers after it was found to have falsified debt collections letters.
The company had to pay out to 45,000 customers it wrote to demanding repayment of loans from fictional law firms.
In some instances Wonga also added charges to customers’ accounts to cover the administration fees associated with sending the letters.
Wonga’s newly appointed chairman, Andy Haste, admitted that the company had made "big mistakes" as he took the helm on 14 July.
Haste pledged to "reinvent" the scandal-hit firm as an "accepted and respected" company.
He has already started to make changes, axing the company’s adverts featuring puppets as he said they "trivialise what we do and attract the young and vulnerable".