31st May 2013
MPs have lashed out at the Office of Fair Trading for failing to take action against payday lenders and home credit firms who use “predatory techniques to target vulnerable people on low incomes” writes Philip Scott.
The consumer credit market in Britain is one of the largest in Europe. In 2011-12, some £176 billion was lent to consumers, with the vast majority of this from credit cards and personal loans. But since the onset of the financial crisis, less has been borrowed through mainstream lending avenues there has been a significant hike in alternative types of lending, such as home credit, essentially loans sold door-to-door and payday lending groups such as Wonga and QuickQuid.
Notably, almost 7m applications for credit were turned down in the last year, while even more applications for other things were rejected due to the applicants’ credit ratings according to research just published by the Debt Advisory Centre.
Payday and home credit loans typically carry very high interest rates and are lent on a short-term basis and this unregulated sector of the market cost consumers at least £450m a year, the Public Accounts Committee said.
As banks lend less, and consumers are increasingly turning to other providers of finance, it is essential that the regulator is aware of emerging risks and is proactive in protecting the consumer from malpractice warned Margaret Hodge Chair of Public Accounts Committee.
Hodge, speaking as the committee published its report on regulating consumer credit said: “The Office of Fair Trading, the regulator of this sector, has been ineffective and timid in the extreme. It passively waits for complaints from consumers before acting. It has never given a fine to any of the 72,000 firms in this market and very rarely revokes a company’s licence.
“It does not understand the market, how much each firm lends and who its customers are, and cannot be certain if directors of companies that have run into trouble are now running other companies. Its investment in regulation is paltry.
“The regulatory regime must stop tiptoeing round the problem. The OFT and its successor as regulator, the Financial Conduct Authority, need better intelligence and a willingness, when hearing of poor practice by lenders, to crack down swiftly with tough sanctions.”
In 2011-12, the OFT spent just £11.5m regulating a market which lent £176bn to consumers or £1 for every £15,300 in the market, which is low by comparison with other regulators in other sectors. “If the OFT had raised its fees it could have raised its game as a regulator,” added Hodge.
However the OFT has now announced plans to clampdown on unscrupulous behaviour by the 50 largest payday lenders.
An OFT, spokesman speaking to the BBC said: “We are disappointed the committee has not acknowledged the legislative constraints under which the OFT currently operates, including a lack of regulatory powers and the limited circumstances where a fine can be imposed.”
Hodges says she is now expecting the OFT to show that this marks the start of a genuine step-up from the inadequate approach that was evident at the hearing and to follow through on its threat to revoke licences if these lenders do not mend their ways.
In response to the report, Richard Lloyd, executive director of consumer watchdog Which? says: “This is a damning verdict on the credit market and the Office of Fair Trading’s failure in the past to step in and protect consumers. It underlines once more why a crackdown is urgently needed to tackle unscrupulous high-cost lenders.
“We are encouraged by the OFT’s recent, tougher, approach but there must be no further delay in taking action, starting with a ban on excessive fees and charges, and stricter rules on affordability checks. When the Financial Conduct Authority takes over the regulation of credit next year, we will continue to push for them to be the strong and proactive regulator consumers need. Let this be the final warning to all lenders to clean up their act.”