George Osborne announces cap on payday loan charges amid concerns

Wonga is one of a number of companies offering payday loans online Credit: Rui Vieira/PA Wire

Chancellor George Osborne has announced a cap on the amount that payday lenders can charge amid fears that the move could have worrying consequences.

He said the cap would apply to a "whole package" of charges including arrangement fees and penalties as well as the interest rates.

But ITV News found that both members of the industry and anti-debt campaigners have concerns, with some warning that a cap could lead to a rise in illegal 'loan sharks'.

Political Correspondent Libby Wiener reports:

Read: Australia's cap on payday loans has revealed issues

The Government will bring in powers to impose the restriction through an amendment to the Banking Reform Bill, but the level of the cap will be set by the new Financial Conduct Authority.

Mr Osborne explained how it would work on Daybreak:

Mr Osborne denied caving in to Labour pressure on the issue after Opposition leader Ed Miliband complained earlier this month that** **payday loan firms were "running riot through our communities".

Labour's shadow business minister Stella Creasy, who has campaigned on this issue, said that the proposal doesn't go far enough "to address the damage this toxic industry has done".

ITV News' Consumer Editor Chris Choi found deep concerns with the proposed cap in both the loan industry and among anti-debt campaigners.

Concerns focuses on a similar policy in Australia, which early evidence suggests led to a drop in the number of payday loan companies and a rise in the use of illegal loan sharks.

Some claimed the Australian example did not result in a large drop in the cost of taking out a loan, and in some cases payday lenders were able to exploit loopholes in the legislation.

Business Secretary Vince Cable warned that any regulation had to be done "very, very carefully" in order to avoid the risk of "letting the 'baseball bat brigade' into this industry" - apparently referring to loan sharks.

New figures released by Citizens Advice found that three out of four borrowers find it difficult to repay payday loans, while 62 percent of loans still come without proper checks to assess whether borrowers can afford to repay.