Britain’s financial watchdog set out new rules on Tuesday to cap the sky-high interest rates offered by payday lenders, bringing down the cost of short-term loans criticised for causing hardship and misery among borrowers.

The Financial Conduct Authority said that from January 2015 the interest and fees on new payday loans must not exceed 0.8 per cent per day of the amount borrowed. Fixed default fees cannot exceed £15 and the overall cost of a payday loan must not exceed the amount borrowed.

Payday lenders, which offer to tide borrowers over until payday, have been accused of charging exorbitant fees and tipping households into a spiral of debt.

Capping payday loan rates will be one of the FCA’s first acts after it took on supervision of about 50,000 consumer credit firms in April.

Of those, around 200 offer short-term pay-day loans - a market now worth about £2.8 billion annually.

"For the many people that struggle to repay their payday loans every year this is a giant leap forward.", said Martin Wheatley, the FCA's chief executive officer.

“For those who struggle with their repayments, we are ensuring that someone borrowing £100 will never pay back more than £200 in any circumstance.”

The financial regulator has estimated consumers will save on average £193 per year, or £250 million of annual savings in aggregate once the new regulation is in place.

Lenders will lose about 42 per cent of their current revenues, or £420 million per year as a result of the new price cap, the FCA estimated.

For most loans in the sample it used in its survey, the FCA calculated that firms are currently generating revenues of between 1 and 2 per cent per day from borrowers.

The final rules will be published in November so that affected firms have time to prepare for, and implement, the changes. The impact of the cap will be reviewed in two years’ time.

Reuters