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Why the OFT is investigating payday loan companies

A number of payday loan companies have had their offices raided as part of an ongoing investigation by the Office of Fair Trading (OFT).

The raids were staged after payday loan company Wonga was found to have an increase in profits of 300% in a year.

During the whole of 2011 the financial regulator only visited the offices of one payday loan company, but has taken significantly more interest in their practices this year with 68 visits in total.

Wonga is one of the most well known payday loan companies, but by no means the only one operating in the market.

Financial crisis has left people vulnerable

Since the financial downturn an increasing number of people have turned to such lenders in order to help make ends meet.

Attention has been brought on them as it became apparent that some of the people engaging the services of payday loan companies were not using them as a short term solution.

The high interest rates were leaving some vulnerable people in a worse situation in the long run, which has led to people calling their practices into question.

Earlier this year a number of MPs called for an investigation and the OFT has responded by carrying one out.

Some lenders could be acting illegally

With some payday loan companies offering annual percentage rates of 4000%, the OFT is investigating to see whether any of them are breaking the law or are unfit to hold a credit licence.

One of the main aims of the raids is to question payday lenders and find out how they treat those who have problems repaying the debt.

There are fears that in rolling over the debt charged on loans those who can’t pay end up with increasingly unmanageable levels of debt, which they will never be able to get on top of.

The Consumer Credit Act allows the OFT and Trading Standards to gain access to premises in order see how businesses are run, and inspect documents they deem important.

Recording telephone calls, looking at online applications and the decisions which have been made are also covered by the act.

Ian Roberts, a partner in the Pinsent Masons law firm, said: “Going to a business and searching through its files is one of the most intrusive forms of action the OFT is able to take. It’s a sign of how pro-active the OFT’s approach is towards payday lenders.”

Investigation set to inform future decisions

The OFT is looking to create an overall picture of the industry and the way that it is run, and wants to ensure that the public is not put at risk through their practices.

There have been a number of calls for payday loan companies to have the amount of interest they charge capped and advertising in certain places banned.

The investigation is likely to inform such decisions in the future and help lawmakers to decide how to handle this side of the lending market.

Recently there have been examples of the public making a stand against payday loan firms – Wonga experienced a public outcry after it suggested on its website that students should use its services over an official student loan.

Football supporters have also campaigned to have the company’s adverts removed from their club’s websites due to the nature of its business.