A CAP on the fees and interest charged by payday lending firms is to go ahead in January in a move to protect borrowers from escalating debts.

The Financial Conduct Authority (FCA) said default fees will be capped at £15 alongside a limit of 0.8per cent per day on interest on unpaid balances in order to ensure that those who cannot repay on time will never have to pay back more in charges than the amount borrowed.

The latest clampdown on the industry was unveiled by the FCA in July and confirmed yesterday following a consultation period.

FCA chief executive Martin Wheatley said: "I am confident that the new rules strike the right balance for firms and consumers. If the price cap was any lower, then we risk not having a viable market, any higher and there would not be adequate protection for borrowers.

"For people who struggle to repay, we believe the new rules will put an end to spiralling payday debts. For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections."

The FCA said that from January 2 someone taking out a loan for 30 days and repaying on time will not pay more than £24 in fees and charges per £100 borrowed.

The moves have been welcomed by consumer groups, although the industry has raised concerns that the crackdown will limit choice for borrowers who will be forced to turn to loan sharks or lenders operating outside the UK.

The FCA estimates that 7per cent of current borrowers will now no longer have access to payday loans - some 70,000 people - as a result of the payday cap.

It said: "These are people who are likely to have been in a worse situation if they had been granted a loan. So the price cap protects them."

The £2.8 billion sector has come under intense scrutiny amid outrage over the way some consumers have been treated. Many of the problems found by regulators have involved people taking on payday debt they can't afford, meaning the loan is rolled over and the original cost balloons.

In the five months since the FCA took over regulation of consumer credit, the number of loans and the amount borrowed has dropped by 35per cent.

Chancellor George Osborne said: "We created a powerful new consumer regulator to regulate the payday lending industry and legislated to require the FCA to introduce a cap on the cost of payday loans.

"The FCA has now confirmed the cap on the total cost of payday loans - not just the interest rate, but also the arrangement fees as well as the penalty fees - that will come into force in the new year.

"This is all part of our long-term economic plan to have a banking system that works for hard-working people and make sure some of the absolutely outrageous fees and unacceptable practices are dealt with."

Mr Wheatley said he expected the number of payday lending firms to fall as a result of the measures.

He said: "Our modelling was intended to allow companies that have got good business models and ethical standards to be profitable and to be able to continue in the industry. That didn't suggest there will be none, it suggested there will be a few but much less than today."

The FCA's move follows a consultation that Christians Against Poverty's specialist advice department responded to.

The Bradford debt charity's research shows that most people turning to payday lending, among its own clients, were using them "in desperate times to buy food, pay energy bills or make rent payments".

CAP’s chief executive Matt Barlow said: "The payday lending industry grew and grew at a time when there were few options for people looking for credit but a growing need amid economic downturn and then welfare sanctions. Unfortunately, the people who were struggling the most were very quickly spiralling into horrendous situations that appeared inescapable and caused much misery.

"We would always prefer that people learn how to budget and save and tackle debt, but these new regulations will mean a much better deal for customers who end up needing money in emergencies.

"However it will be interesting to see how this affects the payday loan industry. Will they make enough money for the model to survive?

"Like them or loathe them, they do provide a service that is easy and simple to access, and other lenders will have to do more to match that."

* For more about debt prevention visit capmoneycourse.org