Payday loan companies will come under fresh scrutiny after the Office of Fair Trading (OFT) launched a review of the sector amid concerns some lenders are taking advantage of people in financial difficulty.
However, consumer groups warned that further action needed to be taken to prevent borrowers falling into “debt traps”.
Payday lenders offer short-term loans to borrowers, usually up to £1,000 at a time. But interest rates and charges are high – APRs can reach as much as 16,000% – and lenders have been accused of targeting low-income borrowers who often end up rolling over their borrowing and accruing large debts.
Consumer Credit Act
The OFT said it will visit 50 major payday lenders and survey industry and consumer organisations to determine whether companies were complying with the Consumer Credit Act and its guidance on irresponsible lending. It will also call for evidence from consumers. Lenders who are found to be breaking the rules face losing their consumer credit licences.
The review will look at how lenders are behaving in several key areas:
• Whether they are giving loans without first checking adequately that the borrower can repay them
• Inappropriately targeting particular groups of people with clearly unsuitable or unaffordable credit
• Rolling over loans so charges escalate and the loans become unaffordable
• Not treating borrowers that get into financial difficulties fairly.
Currently, the OFT’s guidance says lenders should not be “inappropriately encouraging borrowers to increase, aggregate or rollover existing debt to unsustainable levels”, but makes no recommendations on the number of times they can rollover debt. It makes recommendations on what constitutes the “inappopriate” targeting of consumers, but may update this in the light of the review.
In 2010 the OFT warned one lender, Tooth Fairy Finance, against levying disproportionate charges for debt collection, and is currently trying to revoke the credit licences of another lender, MCO Capital, which operates under names including Paycheck Credit, and the broker Yes Loans.
Some payday lenders were taking advantage
The OFT’s director of consumer credit, David Fisher, said he was concerned some payday lenders were taking advantage of people in financial difficulties.
“This is unacceptable. We will work with the trade bodies to drive up standards, but will also not hesitate to take enforcement action including revoking firms’ licences to operate where necessary,” he said.
“The payday sector has grown considerably since the OFT’s high cost credit review in 2010. This, combined with the current tough economic conditions, makes it the right time for us to review the industry and improve protection for consumers.”
Accurate figures on the industry are hard to obtain, but it is clearly a growing sector. Lenders such as Wonga and Quick Quid advertise on mainstream TV channels, and recently it was suggested the sector could one day eclipse the credit card industry.
Consumer Focus estimates that the number of payday loan borrowers rose from 0.3 million in 2006 to 1.2 million in 2009, but as family incomes have been squeezed it is possible many more have turned to this form of high cost borrowing.
Stella Creasy, the Labour MP for Walthamstow who has campaigned for new rules on high cost borrowing, said with the pressure on people’s finances intensifying, the review didn’t go far enough.
“It is the premise that there a few bad apples that I have a problem with – it is the industry as a whole and how it works that causes consumer detriment. As soon as you close down one company, another one will spring up in its place,” she said.
“The OFT review is a welcome admission that they haven’t done enough to enforce the rules that are already in place … but the law is pretty weak as it is. I have had concerns that they [the OFT] haven’t even used some of the powers they have, such as taking action against companies that do not show APRs.”
Joanna Elson, chief executive of the Money Advice Trust, said the growth of the industry had led to a sharp increase in the number of calls to its debt counselling service.
“Just two years ago National Debtline was receiving around 150 calls per month from people with payday loans – that figure has now ballooned to 1,100.”
She said such loans “have a habit of making a bad situation worse”, and added: “We also have concerns about the ease with which payday lenders offer credit, often by purely online applications that are processed in minutes, and sometimes to people who already have several payday loans outstanding.”
Inadequate affordability checks
Sarah Brooks, director of financial services at Consumer Focus, said the group’s research had shown problems with inadequate affordability checks and borrowers being offered multiple new loans or rollovers on existing loans.
“The OFT must make sure companies comply with its guidelines. But we also believe that stricter rules are needed on payday lending to protect consumers from getting into debt traps,” she said.
“We welcome that the industry says it will develop a tougher code of conduct, but the OFT must be prepared to tighten up its rules if problems remain.”
The Consumer Finance Association (CFA), which represents 70% of the payday lending industry, welcomed the OFT’s announcement.
Chief executive John Lamidey said: “The CFA represents some of the largest payday lenders and believe that our Code of Conduct embodies best practice and sets the standard for the industry. Nonetheless, our Code is currently being enhanced to include many more consumer protections and this is due to be launched very soon.
“We welcome the OFT’s review and the CFA and its members are looking forward to working proactively with them to identify areas to enhance consumer protection.”
Originally posted February 29, 2012