MP calls for credit charge cap to be applied to payday loans companies

Stella Creasy, Labour MP for Walthamstow, said that it was wrong for "legal loan sharks" to "self regulate" in the wake of reports about their "toxic" practices and how they affect people living with debt.

"For three years many have been trying to warn the Government they needed to protect consumers from this, calling for Britain to follow the lead of most other countries in introducing a cap on the cost of credit," Creasy said in a blog. "Such caps help limit the price of any loan, so breaking the cycle of debt borrowing in this way can create."

"Now as debt engulfs the household budgets of so many, we see the consequences of the Government’s choice not to act. In the last four years the Citizens Advice service has seen a ten-fold increase in the proportion of clients seeking help with multiple bills that included payday loan debt. There is every sign these problems are getting worse not better. Half of all adults, just over 20 million people, say they are now worried about their current level of debt, an increase from 42% earlier this year," she said.

Creasy made the comments after Wonga announced in its annual statement (51-page / 933KB PDF) that it had made a pre-tax profit for the year ended 31 December 2012 of approximately £84.5 million, up from £62.5m approximately in 2011.

"In many ways ... we are at the very beginning of a financial services revolution enabled by technology, the rapid adoption of smart phones and the internet in particular," Wonga Group chairman Robin Klein said in the statement. "Wonga is well placed to capitalise on this trend and is poised to become a significant player in its evolution."

Payday lenders are companies that offer high interest, unsecured loans intended to be repaid when borrowers receive their next regular income payment. The market was worth between £2 and £2.2bn, or between 7.4 and 8.2 million new loans, in 2011/12 according to estimates by the Office of Fair Trading (OFT), the existing regulator of the consumer credit market.

Earlier this summer the OFT was accused of being "timid rather than tough in its enforcement" in the market by a committee of MPs. The House of Commons' Public Accounts Committee (PAC) also said the OFT had "failed to proactively identify risks of malpractice". The OFT hit back at the criticisms and said it had "taken strong, targeted action to tackle the areas of greatest risk to consumers."

A review by the OFT into payday lenders' practice found a number of problems in the way companies in the sector assess loan applications and said there was evidence of aggressive debt collection practices and problems with the way lenders treated borrowers in financial difficulty.

It said lenders tended to emphasise speed and ease of access rather than the cost of loans and relied too heavily on rolling over loans as a source of revenue.

In June the OFT referred the payday lending market to the Competition Commission for investigation. The Commission has said that it will review whether "there are any features of this market(s) which prevent, restrict or distort competition and, if so, what action might be taken to remedy them".

From April 2014 payday loans companies the responsibility for regulating the consumer credit market will pass to the Financial Conduct Authority (FCA). Under the new regime, the FCA will have more power to make rules and ban harmful products than the OFT currently has. It will be able to apply its full enforcement powers to consumer credit firms, including banning firms and individuals and imposing fines, and it will also have the power to require firms to reimburse consumers who have lost out due to the actions of a lender.