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London - Interest charged on loans offered by payday lenders in Britain will be capped from January to cut the cost of short-term loans criticised for causing misery among borrowers, the country's financial watchdog said on Tuesday.
Payday lenders offer to tide borrowers over until they receive their salary, and anti-poverty campaigners say the sector has grown sharply in recent years as the cost of living rises and some people struggle to have access to credit.
Loans will be capped at 0.8% a day, equating to an annual rate limit of 292%. Britain's biggest short-term lender Wonga, says on its website that its representative annual interest rate is 5 853%.
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"People using payday lenders and other providers of high-cost short-term credit will see the cost of borrowing fall and will never have to pay back more than double what they originally borrowed," the Financial Conduct Authority (FCA) said.
Default fees will be capped at £15, the watchdog said.
"For people who struggle to repay, we believe the new rules will put an end to spiralling payday debts," FCA Chief Executive Martin Wheatley said. "For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections."
READ: Wonga writes off debt for 330 000 customers
The FCA has estimated that lenders will lose about 42% of their revenue, or £420m per year, because of the new rules.
But some payday lenders warn privately the restrictions could force some companies out of business and push borrowers into the hands of back-street loan sharks.
READ: 'Payday' loans taking toll on consumers
The new rules are in line with proposals the FCA put out to public consultation in July and will be reviewed in 2017.
"This is all part of our long-term economic plan to have a banking system that works for hardworking people and make sure some of the absolutely outrageous fees and unacceptable practices are dealt with," said British finance minister George Osborne.
Wonga said it looked forward to launching a cap-compliant product.
Sources in the payday lending industry say lenders are asking the FCA to also cap the charges that banks levy on unauthorised overdrafts.
Consumer organisation Which? said about 2.5 million people, about the same number as those that have used a payday loan, have had an unauthorised overdraft in the past year.
ALSO READ: UK watchdog to cap interest on payday loans
