The Financial Conduct Authority (FCA) has claimed that proposals to impose limits on payday loan rates could prove harmful to consumers seeking emergency cash.
The regulator warned that capping rates for the controversial loans could impact negatively on those who required funds, claiming that borrowers could become "worse off" if restrictions were implemented.
"Many consumers use payday loans because, despite high APRs, that is the only source of credit available to high-risk borrowers in emergencies," the FCA insisted.
"They might be made worse off by caps on APRs or restrictions on how often they can borrow if they reduce availability to some consumers," it warned.
The Office of Fair Trading (OFT) has vowed to crack down on payday loan companies, after expressing concerns at the way some companies conduct themselves.
A report issued by the OFT last month revealed it was allocating a 12-week period to the UK's top 50 payday loan firms for them to re-assess and improve business practices or face losing their licences.
The online payday lender, MCO Capital Ltd, became the first casualty of the OFT's review in March after the government department found it had failed to conduct adequate identity checks for loan applicants, leading to the company being targeted by fraudsters.
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