George Osborne has announced a new cap to the cost of payday loans to prevent companies charging excessive interest.

Pic from Flickr under creative comms licence (images_of_money)

Regulatory body the Financial Conduct Authority will set the cap, which is yet to be announced.

The decision was made off the back of growing support for a cost limit, with Australia introducing similar legislation earlier this year.

Payday lenders have become the subject of intense scrutiny and were earlier this month accused by finance advisor Martin Lewis of ‘grooming’ children to borrow money.

Lenders have been criticised for charging over 5000% annual interest, but Wonga defends its policy on its website saying it equates to 1% fixed interest per day.

Osborne said in a statement: ‘This is all about having a banking system that works for hardworking people and making sure some of the absolutely outrageous fees and unacceptable practices are dealt with. It’s all about the government being on the side of hardworking people.’

Labour leader Ed Miliband has previously outlined his support for a cap, accusing payday lenders of ‘running riot through our communities’.

The Consumer Finance Association – a representative of short-term lending businesses – is sceptical about the changes and has raised concerns based Australia’s experience.

Chief executive Russell Hamblin-Boone said: ‘There has been an increase in the number of people who turn to the growing illegal lending market, which the Australian regulator has admitted is a problem.’