The Office of Fair Trading (OFT) is giving the leading 50 payday loan companies 12 weeks to change their business practices or risk losing their licences after it uncovered evidence of widespread irresponsible lending and failure to comply with required standards.
The consumer watchdog has also announced proposals to refer the entire market to the Competition Commission after it found problems in how lenders compete with each other.
Widespread problems with payday loans
The OFT review found evidence of problems ranging from advertising to debt collection. Particular problem areas included:
- Lenders failing to conduct adequate assessments of affordability before lending or before rolling over loans
- Failing to explain adequately how payments will be collected
- Using aggressive debt collection practices
- Not treating borrowers in financial difficulty with forbearance
Payday loan companies will now have to take action to address the specific concerns of the OFT identified and must demonstrate within 12 weeks that they are fully compliant, or risk losing their licence.
Vulnerable consumers targeted
Payday lending is a top priority for the OFT. Customers in vulnerable financial positions and with limited alternative sources of credit often see their situation compounded by the high rates of interest charged by many companies.
Despite payday loans being described as one-off short term loans which cost an average of £25 per £100 for 30 days, up to half of payday lenders’ revenue comes from longer loans costing more because they’re either rolled over or refinanced.
The OFT also found that payday lenders are not competing with each other for this large source of revenue because by this time they have a captive market.
OFT given “little choice” but to act
Michael Ossei, uSwitch personal finance expert, comments: “Based on its findings, the OFT had little choice but to read payday lenders the riot act. Today’s recommendations show that the OFT and the Government mean business. Clamping down on irresponsible lending and doing more to protect vulnerable consumers lie at the heart of today’s recommendations.
“While payday loans should only ever be used as a last resort, the temptation often proves too much for people in need of cash quickly. For too long payday loan companies have taken advantage of this and have focused their marketing activity on capturing a vulnerable audience – whether through adverts on daytime TV or, more recently, direct text messaging. It’s great that the Government is finally reacting to this, but for many consumers the action comes all too late.
Mr Ossei continued: “What we’ve seen today is encouraging, but it is our hope that an investigation by the Competition Commission, and the move by the Financial Conduct Authority to regulate consumer credit from April 2014, will mean the sector will be brought firmly in line with other lending practices.”