Labour campaigner accepts Osborne surrender over payday loans

George Osborne has denied the coalition is U-turning over payday loans – after confirming the government will force the loan shark regulator to impose a cap on the cost of last-minute credit.

The chancellor said the Financial Conduct Authority (FCA) would have to "go away and decide what is the best form of cap" after the Treasury's decision to adopt a strategy minister Mark Hoban had dismissed as unnecessary earlier this year.

But trade unions warned the changes were coming too late for many, after a survey this summer showed people are borrowing £660 a month, more than treble the amount seen in March 2012.

FCA officials must decide how to cap the arrangement feels, penalty fees and rollovers which all affect how many thousands of per cent interest must be paid by customers.

"I don't accept it's a departure from any philosophy. We want markets that work for people," Osborne told the Today programme.

He said the decision to cap the overall cost of credit, by amending the banking reform bill currently working its way through parliament, would help hardworking people and form a part of the broader strategy of "fixing the banks".

"We've always believed in properly regulated free markets where there's competition but consumers are protected," Osborne added.

"We are stepping in where government needs to step in to create the rules of the market."

Many on the left will notch up the U-turn as a victory for Ed Miliband, who earlier this month declared "the Wonga economy" to be "one of the worst symbols of the cost-of-living crisis".

The chancellor acknowledged the work of individual campaigners like shadow minister Stella Creasy and Conservative backbencher Robin Walker, but refused to accept the policy had been driven from opposition.

"This is the government, I am the chancellor who created the FCA," he declared.

The prime minister's spokesperson repeated that defence in this morning's lobby briefing, telling journalists: "The facts are it is this government that has created a powerful new consumer regulator and it is this government that is taking the steps today. It is the right thing to do."

Creasy, who was promoted to the frontbench shadow team in Miliband's September reshuffle, said this morning the case for capping the cost of borrowing was now "overwhelming".

"Labour is committed to caps on the total cost of credit and we know there's still more to do to address the damage this toxic industry has done to the lives of millions," she said.

"We want a levy on these companies to expand the funds available to credit unions so they can serve more people, powers for councils to limit the growth of these companies on our high streets and a ban on advertising to children of these products.

"That the government is today admitting it got it wrong in opposing these measures and is still playing catch up on how to combat these problems shows it is Labour who have the ideas and determination to tackle Britain's cost of living crisis."

The cap has proved successful in other countries but its introduction comes before a major probe by the Competition Commission into the heavily criticised payday loans industry completes its work.

Walker, a member of the business, innovation and skills select committee, said he was pleased that it was a Tory chancellor which had "accepted the case for action".

"Importantly this is not just a cap on interest rates but on the overall cost of credit including charges and hidden fees," he commented.

"I will be monitoring the regulator closely to ensure that they introduce this in a way that improves access to affordable credit and protects the most vulnerable consumers.

"Along with a cap, I hope the government will consider the case for creating a real-time database of loans as quickly as possible."

Further reforms beyond a cap are also being called for by the IPPR think-tank.

Research fellow Mathew Lawrence said new alternative, cheaper and more sustainable ways of borrowing had to be introduced alongside the cap in order to ensure credit remains affordable.

"To be effective, the cap itself must be inclusive of the total cost of a loan, to stop the lender passing it on in higher fees or hidden charges," he warned.