Last night the government recognised the need to cap the interest rates charged on payday loans, responding to a debate in the House of Lords on a proposed amendment to the Financial Services Bill.

As inflation rises and household incomes fall, increasing numbers of people are borrowing from payday lenders to make ends meet and recent research by Which? found 48% of payday loan borrowers find themselves unable to repay their debts.

The payday loan industry, subject of a revealing Newsnight report last week and a current investigation by the Office of Fair Trading, is a booming business sector in a recession, currently valued at £2 billion and growing.

The amendment to the Bill called for a crucial cap on interest rates to be introduced by the Financial Conduct Authority (FCA) in order to regulate the payday loan industry – regulation that other countries around the globe have already implemented, leaving the UK far behind in terms of protection for borrowers.

Introducing his amendment, Lord Parry Mitchell said:

“This amendment does not seek to ban payday lending – it seeks to give the FCA the power to cap interest rates when they are causing consumer detriment. It is a ‘may’ and not a ‘must’. It puts the responsibility squarely into the hands of the FCA … There are many people who cannot get credit from traditional sources and without legalised payday lenders their alternative is the backstreet loan-sharks whose penalties for non-payment are often pretty brutal. Payday lenders fill a vital gap, but they need to be controlled.”

Peers including the incoming Archbishop of Canterbury the Rt Revd Justin Welby, spoke in support of the amendment and facing a possible defeat in the vote, the government promised to introduce its own amendment to the bill next Wednesday and confirmed that this would include capping the cost of credit. Lord Parry withdrew his amendment on the basis of the government’s assurances.

Capping the cost of credit is a key legislative ask in the campaign against legal loan sharks so this is important step forward in the efforts led by Stella Creasy MP in Westminster.

However, there is also great need to tackle loan sharks in local areas. Co-operative Party members across the country are leading the way in their communities and councils and will be publishing a series of blogs about their campaigns.