Interest charged on loans offered by payday lenders in Britain will be capped at 0.8 per cent a day from January to cut the cost of short-term loans criticised for causing misery among borrowers, the country’s financial watchdog said on Tuesday.

Payday lenders offer to tide borrowers over until they receive their salary, and anti-poverty campaigners say the sector has grown sharply in recent years as the cost of living rises and some people struggle to have access to credit. The new cap equates to an annual rate limit of 292 per cent. Britain's biggest short-term lender Wonga, says on its website that its representative annual interest rate is 5,853 per cent.

"People using payday lenders and other providers of high-cost short-term credit will see the cost of borrowing fall and will never have to pay back more than double what they originally borrowed," the Financial Conduct Authority (FCA) said. Default fees will be capped at £15, the watchdog said.

"For people who struggle to repay, we believe the new rules will put an end to spiralling payday debts," FCA chief executive Martin Wheatley said.

“For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections.”

The new rules are in line with proposals the FCA put out to public consultation in July.

"This is all part of our long-term economic plan to have a banking system that works for hardworking people and make sure some of the absolutely outrageous fees and unacceptable practices are dealt with," British finance minister George Osborne said.

The FCA said the new rules would be reviewed in 2017.

Reuters