George Osborne has denied caving in to Labour pressure after announcing a cap on the costs of controversial “payday loans”.
The Chancellor said the limit, which will cover fees on the lending as well as interest, would help prevent vulnerable consumers being exploited.
The Government will bring in powers to impose the restriction through an amendment to the Banking Reform Bill, but the level of the cap will be set by the new Financial Conduct Authority (FCA).
The move comes after Opposition leader Ed Miliband complained this month that payday loans firms such as Wonga were “running riot through our communities”.
Shadow consumer affairs minister Stella Creasy has been among those pushing for tougher rules, but ministers had resisted the idea of a cap, warning that less creditworthy individuals could end up being forced into the arms of loan sharks.
In a round of broadcast interviews this morning, Mr Osborne rejected claims of a U-turn, or that he was aping Labour by intervening in markets.
“I don’t accept it’s a departure from any philosophy,” he said.
“The philosophy is we want markets that work for people, and people who believe in the free market, like myself, want that free market to be properly regulated.
“But the idea that the Labour leadership, who were running this country for 13 years and did nothing in this space, took a lead is, frankly, fanciful.”
Mr Osborne told ITV’s Daybreak: “We are going to introduce a cap on the cost of these loans and I mean a cap on all the different elements brought together because it is not just the interest charge, it’s also the arrangement fees and the like, to protect people who take out these loans to make sure they are not being exploited, to make sure hard-working people get a fair deal from the financial system, whether it’s the banks or the payday lenders or internet lenders.
“The best thing is to empower this body we have created, the consumer regulator, the consumer authority is going to look at all of this because I think one of the traps here is to think you can just control one part of this industry and then you’ll find it’s a bit like squeezing a balloon, the costs will appear somewhere else.”
Liberal Democrat business minister Jo Swinson warned in September that interest rate caps to tackle payday lenders could result in “unintended consequences”.
Business Secretary Vince Cable, speaking on BBC Breakfast, said: “What we have done is we have been introducing tougher regulation of payday loans, this is something that has already been agreed, is going through Parliament.
“We commissioned a study from Bristol University that warned about the dangers, if it is not done carefully, of letting the ‘baseball bat brigade’ into this industry.”