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The chancellor has executed an audacious and politically significant U-turn by announcing the introduction of a cap on payday loans.
George Osborne executed a hasty politically driven U-turn, surprising even coalition Liberal Democrat ministers, when he ended years of resistance and announced a legal cap on the overall cost of payday loans.
George Osborne said the cap on the overall cost of credit was the next logical step as the coalition sought to regulate what had been a wholly unregulated market.
In a sign of the speed of the Treasury about-face and the secrecy surrounding the chancellor's move, papers distributed on Friday for Monday's inter-departmental ministerial meeting on consumer credit contained no reference to the policy shift.
Labour said Monday's announcement was an admission by Osborne that he had got it wrong for years, and was once again being forced to respond to Labour's cost-of-living agenda.
Labour claimed the move showed the success of its cost of living agenda and revealed the Tories' strategic confusion and weakness, including in Osborne's own attitude to the role of the state in regulating markets.
The government has been resisting a cap on the much-reviled payday loans industry for years, saying the measure was not necessary or should wait for further investigations into the functioning of the industry.
Osborne may feel he has shot one of Labour's foxes and done something to dispel the impression that the Conservatives do not represent the low-paid.
Only last month, the regulator the Financial Conduct Authority said there was no need for a cap and the issue had been referred to the Competition Commission for further discussion.
He presented the move as "a logical next step" to regulate a market left unregulated by the previous Labour government, adding that evidence in Australia showed caps on the overall cost of loans could be effective.
The timing of the announcement led observers to conclude that politics as much as policy had driven the decision, which comes only days before the autumn statement.
The chancellor said that there would be controls on charges, including arrangement and penalty fees, as well as on interest rates. "It will not just be an interest rate cap. You've got to cap the overall cost of credit."
Until Monday's announcement, both the government and the FCA had been resisting the move despite strong pressure from Labour and individual Tory MPs eager for their party to be doing more to be seen on the side of hardworking people.
He said the move would "make sure that hardworking people get a fair deal from the financial system, whether it's the banks or the payday lenders or the internet lenders".
Senior Treasury officials last week met leading figures from the American community credit industry and the Federal Reserve. But the impetus appears to have been partly political and partly the product of conversations with the FCA.
A possible catalyst for Osborne's move was a renewed push from backbench Lib Dems to impose a cap using an amendment to the banking bill in the Lords this week. Earlier this month the Treasury had been given full ministerial responsibility for consumer credit, taking responsibility from the business department.
Osborne said he was not just introducing a crude cap on interest rates but a cap on the overall cost of credit. He also announced that the banking bill would impose a duty on the new regulator to impose a cap.
In another sign of the haste of the decision, the Treasury has yet to set out its alternative amendment.
He praised the Labour MP Stella Creasy for campaigning on the issue for so long, but refused to accept that her party deserved any credit.
Osborne said he would be imposing a legal duty 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 now it would be forced to do so. The chancellor said it would be for the FCA to decide the specifics of how the cap would work.
Osborne denied that the effective price restrictions were in breach of overall Conservative free market philosophy. The move is likely to be seen as a sign that the party recognises that it needs to respond to Labour's continuing poll lead and the need to do more to help the low paid.
Osbornemade his decision even though the Competition Commission had just started an inquiry into the industry.
He said: "The Conservative philosophy is that you want markets that work for people, and people who believe in the free market, like myself, want that free market properly regulated."
A Lib Dem source said: "The Lib Dems have been pushing for tougher action on payday lenders for well over a year – at every step of the way this has been met with strong resistance from Conservatives in the Treasury. It seems the Tories read the runes on this one and realised that increasingly the evidence and political tide were against them. Their change of heart is very welcome but none of this positive action would have happened without the Lib Dems in government."
He said payday lending was highly unregulated and "in fixing the banks it was necessary to fix all parts of the banking and financial system".
The Lib Dem backbencher Lord Starkey held discussions about his alternative amendment last week with the Lib Dem consumer affairs minister Jo Swinson and Treasury chief secretary Danny Alexander. Starkey was calling for a maximum cap on the size of a loan of £300and admitted that he was astonished by Osborne's decision.
He added: "We have always believed in properly regulated but free markets where there is competition and consumer protection."
Australia has an interest rate limit of 4% per month, after a maximum up-front fee of 20%. However, even in Australia, borrowers can still face charges, and penalties for late payment are allowed to be as much as twice the loan amount.
The chancellor said he had been in discussion with the regulator and it became clear that parliament could set the duty on the regulator to have a cap.
The chancellor praised the shadow consumer affairs minister Stella Creasy for her campaign.
"It is not just a cap on the rate of interest; [it is] the arrangement fees, the penalty fees if you fail to pay back, the rollover and restricting the use of continuous payment authority. When you look another countries and some US states there is increasing evidence that caps work.
Creasy, the Labour MP for Walthamstow, who has campaigned against the payday lending industry's practices, criticised the government for sending "confusing" signals to the regulator, and said the coalition was "playing catch-up" with Labour, who have said they would bring in a cap if they were handed power in 2015.
"Ultimately parliament and governments have got to lead. We believe in regulated markets that work for working people."
In an interview on Radio 4's Today Programme, Creasy said that introducing a duty to cap at this stage would "leave in tatters the consultation announced a few weeks ago where ministers specifically ruled out the move to introduce a cap".
Citing the work of Adam Smith and John Locke, he said: "The idea that this is inconsistent with free market or Conservative philosophy is nonsense."
Creasy said the regulator had told her it was not using its existing powers to cap interest rates in the sector because there was insufficient political will for it to do so.
He rejected the idea that the coalition was following Labour, saying: "Labour was in office for 13 years. They were in the Treasury for all those years. They did absolutely nothing.
"I am happy to pay tribute to some individual MPs like Stella Creasy and Robin Walker, who have campaigned on this issue 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,"
Creasy, who was promoted to shadow business minister in the last opposition reshuffle, accused Osborne of following where Labour led. She said: "Just two months ago this government criticised Ed Miliband for wanting to reform broken markets, and now today we see them following Labour's lead on the need to act against legal loan-sharking.
"Whether in parliament or out on Britain's streets in the Sharkstoppers campaign, we have been making the case that capping is a tried and tested method used in many other countries to tackle the problems caused by payday lenders.
"For too long, David Cameron has ignored our pleas to act and it is cash-strapped consumers caught in the spiral of debt these companies generate who have paid a heavy price as a result.
"Labour is committed to caps on the total cost of credit and we know there's still more to do to address the damage this toxic industry has done to the lives of millions.
"We want a levy on these companies to expand the funds available to credit unions so they can serve more people, powers for councils to limit the growth of these companies on our high streets and a ban on advertising to children of these products.
"That the government is today admitting it got it wrong in opposing these measures and is still playing catchup on how to combat these problems shows it is Labour who have the ideas and determination to tackle Britain's cost-of-living crisis."
Osborne's change of heart came the day before peers were due to vote on an amendment hat would have set a maximum loan for pay day lenders. The amendment, sponsored by the Liberal Democrat backbencher Lord Sharkey, would allow a maximum loan of £300, set a cap on charges of a maximum 10% of the loan value and prevent people from having two or more loans at the same time. It would also have allowed a loan to run for no more than 31 days, with a 60-day extension, and require a 24-hour gap between loans.
Although the government has not adopted the specifics of the amendment – the cap will be decided by the FCA – Sharkey said: "Uncapped payday loans get people into real trouble so I am delighted George Osborne has acted in response to my amendment."
The head of Citizens Advice, Gillian Guy, said: "This is a cap on the exploitation of people struggling with the rising cost of living. Payday lenders have failed to stick to their own promises to treat customers fairly. The government's plan to cap the cost of loans only goes to show how out of control the industry is."
Russell Hamblin-Boone, the chief executive of the Consumer Finance Association, which represents the major short-term lenders operating in the UK, said: "We are surprised by the government's announcement as we already have voluntary caps on the number of times a loan can be extended and on fees and interest for people in financial difficulty.
"If the objective of the proposed cap is to drive out rogue lenders the Australian experience has had some success, however it has not reduced household debt or the need for credit. Instead there has been an increase in the number of people who turn to the growing illegal lending market, which the Australian regulator has admitted is a problem."
In a statement on Monday, the Treasury said: "The government has always kept the case for a cap under review as the market has evolved. With growing evidence in support of a cap and emerging lessons from other countries – especially the cap on costs introduced in Australia this year – the government believes it is right to use the opportunity of this legislation for parliament to be clear on its intention.
"The government has discussed and agreed this with the FCA. To ensure that there is an evidence-based approach to designing the cap, the government is asking the FCA as regulator to use its existing planned work to report on its proposed approach.
"Payday lenders are already on notice following the announcement by the FCA of tough new rules they will have to meet next year."
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