Cost of payday loans set to plunge as regulator imposes cap - but Wonga vows it will survive tighter regulation

• No borrower will have to pay back more than twice what they borrowed
• Cap will save borrowers an average of £193 a year
• Industry could lose revenues worth around £420million
• Wonga chairman said it would survive the cap - but its puppets will be retired

By Rob Davies for the Daily Mail and Rachel Rickard Straus

Updated: 05:10 EDT, 15 July 2014

The cost of taking out a payday loan is set to plunge after the financial watchdog announced a cap on lending today.

From January borrowers will not have to pay more than 0.8 per cent per day of the amount borrowed, including interest and fees – even if the loan is rolled over.

The cost, through interest and charges, of a payday loan will never be allowed to exceed the loan sum, so no borrower will have to pay back more than twice what they borrowed.

Axed: Wonga is set to ditch the puppets that appear in its adverts

The proposal from the Financial Conduct Authority will mean borrowers save £193 on average per year, translating into £250million annual savings overall.

However the cap is set to cost the industry about £420million in lost revenues.

The cap is just one of many new restrictions imposed on lenders as part of a clampdown on lending practises.

As of July 1, lenders must put ‘risk warnings’ on television adverts. They are also banned from rolling over loans more than twice and must check potential customers can afford to take out debt before giving them loans.

The measures are set to have a dramatic impact on the lending industry, as a drop in profits from default charges starts to squeeze profits.

But Wonga’s new chairman Andy Haste has vowed the UK’s biggest payday lender will survive tighter regulation, although the puppets from its adverts will not.

Haste, the former chief executive of RSA Insurance, said Wonga had ‘made mistakes’ and that he would need to implement ‘real change if it is to have a sustainable future’.

The promise comes with Wonga in the spotlight over sky-high interest rates and threatening letters sent to borrowers purporting to be from solicitors who did not exist. Wonga escaped with a £2.6million compensation bill over the letters.

Haste added that the firm will survive the FCA’s cap on lending costs.

‘In the near term, profitability will be reduced and we will become a smaller business,’ Haste admitted. ‘I believe we can come through that.’

But Haste said the pensioner puppets used in Wonga’s adverts will be put out to pasture, because they might appeal to impressionable youngsters.

Crackdown: No borrower will have to pay back more than twice the cost of their loan under the new rules

‘There’s a long road ahead to repair our reputation and be an accepted part of the financial services sector,’ he said.

The new cap will mean that anyone who borrows £100 for 30 days from a payday lender and pay backs on time will not pay more than £24 in fees and charges and someone taking the same loan for 14 days will pay no more than £11.20.

Fees for borrowers who cannot repay their loans on time must not exceed £15 and they must never have to pay back more in fees and interest than the amount borrowed.

It means that someone struggling with repayments on a £100 loan will never pay back more than £200 in any circumstance.

FCA chief executive Martin Wheatley said of the cap: ‘There have been many strong and competing views to take into account, but I am confident we have found the right balance.

‘Alongside our other new rules for payday firms - affordability tests and limits on rollovers and continuous payment authorities - the cap will help drive up standards in a sector that badly needs to improve how it treats its customers.’

Consumer groups welcomed the news, although some warned even tighter regulation is needed.

Which? executive director, Richard Lloyd, said: ‘It's good to see the regulator tackling the eye-watering cost of payday loans, especially the excessive default charges that sting struggling borrowers and lead them into spiralling debt.

‘Payday lenders have been running wild for too long and the FCA must keep them on a tight leash to protect consumers. The cap on the cost of loans should be kept under review and tightened up further if it doesn't work as intended.'

Charity StepChange received nearly 14,000 cries for help last year from people who were struggling with five payday loans or more.

Its head of policy Peter Tutton said: ‘The decision to cap the cost of loans at 100 per cent of the amount borrowed, will go some way to addressing the serious problem of lenders artificially inflating debts through rollovers and excessive interest and charges.

‘We have reservations that this will offer great enough protections for financially vulnerable consumers. StepChange Debt Charity clients owe an average of £1,647 in payday loan debt, doubling this amount will still add a substantial financial burden.’

Martin Lewis of MoneySavingExpert.com, added: 'I hope this is the end of the high cost credit industry taking advantage of some of the nation's poorest and financially illiterate people.

'It’s now crucial we focus on financial education so that people that need access to quick cash aren’t lured in by illegal loan sharks or any other forms of costly credit.'

Russell Hamblin-Boone, chief executive of the Consumer Finance Association that represents some of the best-known short-term lenders in the UK said: 'Anyone who thinks that a price cap is good news for borrowers, should have a thought for those many people who will be turned down for loans because the best lenders will have to reject those with the worst credit records.

'We support a cap that allows the industry to operate profitably with the right protection in place for vulnerable people. With new regulations and tighter affordability checks, critics must now face up to the fact that most people use, need and like short-term credit and the measures in place are more stringent than for any other form of consumer credit.'

Wonga has previously been tipped as a candidate for a stock market float but Haste said it was ‘many years away from that decision’. Haste is leading the search for a chief executive after a volatile period that saw founder Errol Damelin and chief executive Niall Wass step down.

He said acting boss and chief financial officer Tim Weller might throw his hat in the ring.