Restrictions on the amount payday loan companies can charge on interest are expected to be announced by the industry watchdog later today.
The Financial Conduct Authority (FCA) will impose severe restrictions on the amount of interest which each company can charge, as concerns over the excessive cost of fast credit spiral.
FCA chief executive Martin Wheatley will set out details of an industry consultation which will lead to a cap being in place by the start of next year.
Payday loans have proved a controversial business model, with many accusing companies like Wonga of "legal loan sharking" and exploiting those struggling to make ends meet.
The Financial Ombudsman has expressed concerns that too many people struggling to repay loans felt powerless to make a complaint because of the stigma surrounding payday loans.
Principal ombudsman Caroline Wayman said: "We often hear from people who took out a payday loan as a desperate last resort and blame themselves when the debt starts to spiral out of control.
It's important that people don't feel trapped with nowhere to turn because of the stigma associated with short-term lending."
The number of complaints over payday loans has more than doubled since 2012, new figures have shown, as the Financial Ombudsman warns people to speak up about debt worries.
Almost 800 people made complaints about payday lending in the 2012/13 financial year, a report released today shows, compared with fewer than 300 in the previous financial year.
In almost two thirds of cases taken on by the ombudsman, the office found in favour of the consumer.
- March 2013 - The UK's biggest payday lenders are threatened with being put out of business after a damning report uncovers evidence of "widespread irresponsible lending", by the Office of Fair Trading (OFT).
- June - The OFT refers payday lenders to the Competition Commission for a full-scale probe, saying it has found "deep-rooted" problems.
- July - The Archbishop of Canterbury told Wonga the Church of England wants to "compete" it out of existence as part of its plans to expand credit unions.
- November - More than one million people plan to take out a payday loan to cover the cost of Christmas 2013, research by the Money Advice Service (MAS) finds.
- June 2014 - The CMA says payday loan borrowers are paying around £60 a year over the odds because of problems shopping around.
Over-regulation of the payday loans market may force reputable lenders to abandon the practice and force the most vulnerable into the arms of loan sharks, a trade association has said.
Russell Hamblin-Boone, chief executive of the Consumer Finance Association (CFA), which represents short-term lenders warned against introducing too many rules to curb the industry's controversial practices:
The industry has already changed significantly for the better and short-term lenders are now leading the way through initiatives such as real-time credit checks.
However, over regulation is a real risk. Lenders are facing the prospect of a Government price control before the full impact of new regulations is known.
Borrowers consistently tell us how much they like and value short-term credit but if the regulator turns the screw too far and drives reputable lenders out of the market, these borrowers will be forced to look for credit elsewhere and this creates a perfect market for illegal lenders.
Controversial practices like rolling over loans more than twice will be banned in a clampdown on the predatory practices used by payday lenders, according to the industry watchdog.
The Financial Conduct Authority will also introduce obligatory warnings on adverts, so customers are aware of how difficult the problems caused by late repayments can be.
They will hen be led to the Government-backed Money Advice Service (MAS) for help.
The £2.8bn industry has come under fire for lending to people who have not been afford the repayments, meaning the loan is rolled over and the cost balloons.
Charity StepChange received nearly 14,000 cries for help last year from people who were struggling with five payday loans or more.
A rap song inspired by the Archbishop of Canterbury's warnings about payday loans has been released - complete with music video.Read the full story ›
The Competition and Market Authority has said payday loans customers are "paying the price" for the lack of competition in the sector.
Simon Polito, chairman of the Payday Lending Investigation Group, said:
Short-term loans like these meet a very clear need for around 1.8 million customers a year.
This level of demand isn’t going to go away so it’s important to ensure that this market works better for customers.
Our focus is now on taking practical steps that will make a real difference to borrowers so we now want to hear from all those involved on how best we can achieve this.
The Competition and Markets Authority has ruled the lack of competition in the payday loans sector:
- Could be responsible for adding £5-£10 to the average cost of a payday loan
- This is relative to a typical loan of £260 taken out for just over three weeks
- A typical customer (who takes out six loans a year) could save £30-£60 per year
- The gap between the cheapest and most expensive deals for a month-long £100 loan is more than £30
The Competition and Markets Authority has decided payday loans are more expensive due to a lack of competition in the sector.
ITV News Business Editor Joel Hills reports:
Competition and Markets Authority decides payday loans are more expensive than they should be due to a lack of competition between lenders.
CMA looking at creating independent price comparison website for payday loans and clearer disclosure of charges if loan not repaid on time.