The consumer watchdog investigated payday lenders and their lending practices and have issued an ultimatum : Clean up in 12 weeks, or face a ban.
The office of fair trading investigated 50 payday lenders (making up 90% of the market) and revealed there is widespread irresponsible lending
Payday lenders told to clean up act or face ban
The regulator also found evidence of “deep-rooted problems” in how lenders compete with each other and proposed to refer the payday lending market to the Competition Commission.
Clive Maxwell, OFT chief executive, said: “We have found fundamental problems with the way the payday market works and widespread breaches of the law and regulations, causing misery and hardship for many borrowers. “Payday lenders are earning up to half their revenue not from one-off loans, but from rolled over or refinanced deals where unexpected costs can rapidly mount up.”
Short-term loans have become a highly lucrative area with specialised lenders targeting those excluded from traditional borrowing.
Wonga, one of the biggest payday lenders in Britain, more than trebled its earnings last year. Its annual percentage rate (APR) stands at 4,214pc, according to its website.
The Office of Fair Trading (OFT) carried out spot checks of 50 major lenders and obtained information from all 240 lenders in the market in a year-long probe into the £2bn payday sector. The review said particular problem areas included lenders failing to adequately assess affordability before lending, failing to explain properly how payments will be collected and aggressive debt collection practices.
It said that, despite payday loans being described as one-off, short-term loans costing an average of £25 per £100 for 30 days, up to half of payday lenders’ revenue comes from loans which last longer and cost more because they are rolled over or refinanced.
Lenders were competing on speed and easy access to loans, rather than price, and relied too heavily on rolling over loans, according to the review.
The review said: “It would appear that payday lenders’ revenues are heavily reliant on those customers who fail to repay their original loan on time.”
The fifty leading lenders must take “rapid action” to address the OFT’s concerns and show within 12 weeks that they are fully compliant. Any firms which fail to cooperate will face enforcement action. Charities have reported rocketing numbers of complaints about payday lenders from borrowers. The Money Advice Trust (MAT) recently said that complaints about payday loans have doubled year-on-year to reach a record of 20,000 across 2012.
The charity warned that “something is drastically wrong” with the way that expensive loans are being handed out to people who cannot afford them, with lenders often rolling over loans.
Joanna Elson, chief executive of the Money Advice Trust, said: “It is now vital that the industry is subject to ongoing close monitoring and that lenders adhere to clear and strict codes of conduct. We hope this review is a kick start to that process.”
A new regulator, called the Financial Conduct Authority (FCA), which takes over the consumer credit market from next year, has committed to prioritise tighter rules on payday lending that could come into effect from April 2014.
The FCA’s rules will be binding and if they are broken the regulator will have tough enforcement powers including imposing unlimited fines and the ability to claw consumers’ money back. The Government is also planning to bring in tougher rules on how payday lenders advertise.
Business Minister Jo Swinson said: “The evidence of the scale of unscrupulous behaviour by payday lenders and the impact on consumers is deeply concerning. “The government is committed to tough action to tackle these problems. The Office of Fair Trading’s (OFT) enforcement action will stop payday lenders taking advantage of those in financial difficulty. In April 2014, we are giving responsibility to regulate this industry to the FCA, who will have more rigorous powers to weed out rogue lenders.
“The government also wants to see tough action to clampdown on the advertising of payday lending, and will start immediate work on this. “The government will work closely with the Office of Fair Trading, Advertising Standards Authority, Committees of Advertising Practice, and industry to make sure advertising does not lure consumers into taking out payday loans that are not right for them.”
The government will not impose a cap on credit, but the FCA will have powers to do so from April 2014.
Stella Creasy, a Labour MP who has campaigned for strict rules governing payday lenders, said the announcements on credit checking and advertising were “ducking the real issues”.
“The best way to prevent the problems payday lending causes is to cap the costs of credit, so that people do not get into debt in the first place,” she said.
Consumer group Which? recently found that 79pc of people, equating to around 38.5 million adults, use some form of credit. Which? executive director Richard Lloyd said: “It’s time for a crackdown on irresponsible lending, especially for high cost lenders who are exploiting consumers struggling in the current economic climate, so we’re pleased to see the Government planning tough action.
“We want to see the regulators immediately crack down on payday lenders who flout the rules and for new powers to be used to take strong, proactive action to clean up the whole of the credit market.”
The group recorded evidence of how households are turning to high cost credit after exhausting cheaper forms of borrowing.
Half of people who used a payday loan or dipped into an unauthorised overdraft said they had been rejected for credit in the past year.
The OFT will make a final decision on whether to refer the payday industry to the Competition Commission by June 2013.
Russell Hamblin-Boone, chief executive of the Consumer Finance Association, said: “This is the end of a year long review and we will take time to review the issues that have been raised. We recognise there are concerns about the industry however these reports are a snapshot in time and work is already underway.
“Since the industry was investigated last year we have introduced a series of safeguards to ensure that our members are dealing with customers responsibly. From credit checking all new applications, to limiting loan rollovers and providing help for those who get into financial difficulty, we have raised standards all the way through the loan process. We go far beyond the legal requirements but if the Government wants us to do more, we will consider its proposals.”
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