The introduction of a cap on payday loans could wipe out most of the market, including the likes of Wonga, Quick Quid and Dollar Financial, which between them make up 70% of the payday loans market by turnover.
The measures, which come from the Financial Conduct Authority, will be forced to limit interest and charges on loans to 0.8% of the value of the loan amount.
The changes will apply from January 2015.
Martin Wheatley, the chief executive of the FCA has admitted that the move will see the eradication of the vast majority of the UK’s some 400 payday lenders, saying that perhaps as few as four or five may survive. Only “ethical” firms will be allowed to remain profitable, he said to the BBC.
The FCA hopes that people currently using Payday lenders will find alternative sources of short-term finance. These could include loans from high street banks, from credit unions, or from employers or family.
“The banks tell me that somewhere between a third and a half of those currently taking out payday loans are customers they would have been able to lend to,” Wheatley told the BBC Today programme.
However, under the new rules, a gaping hole will be created as in excess of 70,000 people will not be able to gain finance in these ways, according to FCA figures reported by the FT.
But could the demise of payday lenders see people turning to even less scrupulous lenders for urgently needed money?
The current wage crisis means Britons are now experiencing the greatest fall in wages, in real terms, since the Victorian period. Dependence on foodbanks is spiralling and theft for basic items like food is rising sharply.
The BBC Today programme highlighted concerns in the North East of England, revealed this week by the Citizens Advice Bureau as the area which has the highest level of payday lending in England. People interviewed on the programme in Newcastle said they had been doorstepped by loan sharks offering their services, while others had been approached by loan sharks in the street.
But Wheatley denied that this would see a major increase in people using illegal loan sharks for short-term loans, saying that the majority of affected people will simply do without loans, or ask friends or family for financial assistance. “According to our own analysis, 5% said they were aware of loan sharks, only 2% said they would use them,” Wheatley said.