* Interest on loans must not exceed 0.8 pct per day
* Default fees cannot exceed 15 pounds
* Cost of a payday loan cannot exceed amount borrowed
* Lenders will lose 42 pct of revenue - FCA
* Citizens Advice says banks must offer alternatives
(Adds comments from lawyer, details of UK payday lenders)
By Matt Scuffham
LONDON, July 15 New rules will cap sky-high
interest rates offered by payday lenders in Britain, bringing
down the cost of short-term loans criticised for causing misery
among borrowers and potentially wiping out almost half the
Payday lenders, which offer to tide borrowers over until
they receive their salary, have been accused of charging
exorbitant fees and tipping households into a spiral of debt.
Britain's biggest short-term lender Wonga charges an annual
interest rate of 5,853 percent, according to its website.
The Financial Conduct Authority (FCA) said that, from
January 2015, the interest and fees on new payday loans must not
exceed 0.8 percent per day of the amount borrowed. Firms are
currently charging 1-2 percent per day, it said.
Fixed default fees cannot exceed 15 pounds ($25.52), under
the new rules, and the overall cost of a loan must not exceed
the amount borrowed.
Lenders will lose about 42 percent of their revenue, or 420
million pounds per year as a result of the cap, the FCA said. It
estimated consumers would save on average 193 pounds per year,
or 250 million pounds ($425.4 million) a year in total.
Payday loans have grown in popularity in Britain since the
2008 financial crisis, which left banks less willing to offer
temporary credit and poorer families struggling to cope with
rising living costs and low growth in wages.
Politicians from all parties are keen to position themselves
on the side of low-income families ahead of a general election
in 2015 and have been pressing for a clampdown of the industry.
"The government is absolutely determined to ensure that
customers are protected from unfair payday loan costs," a
spokesman for Britain's finance ministry said on Tuesday.
Payday lenders have been preparing for more rigorous
controls since the British government asked the FCA to take over
supervision of the industry in April following accusations of
shoddy treatment of customers by some firms.
Wonga has recruited financial services industry veteran Andy
Haste to oversee changes at the business which was fined last
month for sending bogus letters from non-existent law firms to
customers struggling to make repayments.
It is not the only firm to have been embroiled in scandal.
U.S. payday lender Dollar Financial, which trades in Britain as
The Money Shop, on Monday agreed to refund 700,000 pounds in
interest and default charges to customers who were loaned too
In the United States, Cash America was ordered to
refund customers $14 million and pay a $5 million fine to settle
allegations it improperly pursued some customers debt and
overcharged military service members.
A report last year by Britain's Centre for Social Justice
said around half of payday loan users had taken out the loans
because they had no other access to credit. It also said the
cost of living had risen by 25 percent in the past five years,
driven by increases in rent, gas and electricity bills while
real wages had fallen to the levels they were in 2003.
Opposition Labour lawmaker John Mann said the FCA's measures
would "make a significant difference to those people reliant on
payday lenders and bring some much needed regulation to this
area of the financial services market".
However the Consumer Finance Association, which represents
the payday lending industry in the UK, has argued that similar
caps in other countries such as France and Germany have forced
borrowers to turn to illegal lenders.
The previous light-touch regulation of the industry had made
Britain a magnet for U.S. lenders such as Dollar Financial
Group, which owns The Money Shop and PaydayUK and Cash America,
which trades as QuickQuid, as well as Wonga, founded by South
African entrepreneur Errol Damelin, and many smaller operators.
Emily Reid, a partner at international law firm Hogan
Lovells, said the bigger lenders would be able to adapt their
businesses to meet the new requirements and take advantage of
smaller players being unable to do so.
"The larger companies are quite likely to see this as an
opportunity because the tightening up of the rules will force
quite a few people out of the market. They have the resources
and the willingness to work within the rules," she said.
Shares in Cash America were up 1.2 percent at 1340 GMT.
Wonga declined to comment on Monday. Dollar Financial and
Cash America could not be reached for comment.
When it took over supervision of the industry, the FCA said
up to a quarter of payday lenders could exit the market as a
result of stricter rules. Edinburgh-based Cheque Centre and
Barnsley operator QuickLoans.co.uk have already said they will
stop selling payday loans.
The Citizens Advice Bureau, a charity that helps people with
legal and financial issues and had previously accused payday
lenders of bullying their customers, said borrowers needed more
choice in short-term lending and called on banks to offer
short-term loans as an alternative to payday lenders.
($1 = 0.5877 British Pounds)
(Additional reporting by Sophie Sassard, Kate Holton and Carmel
Crimmins; Editing by Pravin Char)