Short term credit lenders such as payday loans companies could face tightened regulation and unlimited fines if they break the rules, under plans presented to Parliament as part of the new Financial Services Bill.
Under current law payday lenders face fines of up to £50,000 if they fail to stick to the rule book, a cap that could be lifted completely when the Financial Conduct Authority (FCA) takes over from the Financial Services Authority (FSA) early next year as part the Bill.
Lenders are likely to face greater scrutiny before being issued a licence to operate, and borrowers will be required to provide a more detailed credit report before being able to borrow.
The FCA is due to begin operations early next year and will primarily focus on protecting consumer and regulating consumer finance.
The FCA is likely to adopt a more 'interventionist' approach to regulating consumer finance. Mark Hoban Financial Secretary to the Treasury said: "It will be a more proactive regulator, empowered to tackle problems before consumers are harmed and able to respond much more quickly to market developments,"
Many consumer groups will welcome the move after widespread reports of an increasing number of individuals turning to payday loans in a tough economic climate. Which? chief executive, Peter Vicary-Smith, said:
"[we are] delighted the government has listened to our calls for a tough financial regulator that fights on behalf of consumers.
"The transferral of consumer credit to the FCA means it can give greater scrutiny to this market and encourage responsible lending."