6th March 2013
The Office of Fair Trading has threatened the 50 biggest pay day lenders and given them twelve weeks to change their business models or risk losing their licences to operate.
The OFT says it has uncovered widespread irresponsible lending and failure to comply with the required standards. It is proposing referring the payday lending market to the Competition Commission because it has found deep-rooted problems with how lenders compete with each other. The move is subject to consultation though this is arguably a formality.
The review into the £2 billion payday lending sector found evidence of problems throughout the life cycle of payday loans, from advertising to debt collection, and all across the sector, including lenders that are members of established trade associations.
The OFT listed the following areas of non-compliance included:
The OFT says the 50 lenders will have to take rapid action to address the specific concerns identified with each of their businesses. They must demonstrate within twelve weeks that they are fully compliant, or risk losing their licence and a failure to cooperate with this process will trigger enforcement action.
If adds: “Customers often have limited alternative sources of credit and are frequently in a vulnerable financial position. Combined with this, the high rates of interest charged by many payday lenders can make the consequences of irresponsible lending particularly acute.
“Lenders were found to compete by emphasising the speed and easy access to loans rather than the price and also to be relying too heavily on rolling over or refinancing loans. The OFT believes that both these factors distort lenders’ incentives to carry out proper affordability assessments as to do so would risk losing business to competitors. Too many people are granted loans they cannot afford to repay and it would appear that payday lenders’ revenues are heavily reliant on those customers who fail to repay their original loan in full on time.
“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 that last longer and cost more because they are rolled over or refinanced.”
The OFT says that it 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.
Clive Maxwell, OFT Chief Executive, says: “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 re-financed deals where unexpected costs can rapidly mount up.
“We are proposing to refer this market to the Competition Commission, which has wider powers to get to heart of the problems in this market and to identify and impose lasting solutions that protect consumers. Irresponsible lending is not confined to a few rogue payday lenders – it is a problem across the sector. If we do not see rapid, significant improvements by the 50 lenders we inspected they risk their licences being removed. Payday lending is a top enforcement priority for the OFT.”
The move has been welcomed by Which? executive director Richard Lloyd but he wants action taken to help people who may be getting themselves into trouble today. He says: “We’re pleased the Government and regulators are planning tough action to crack down on irresponsible lending, especially on high-cost lenders that exploit consumers struggling to get by in tough economic times.
“Which? research has repeatedly found poor affordability checks and excessive charges that push consumers into a vicious cycle of debt. So a referral of the payday market to the Competition Commission to consider its future is a good move, but there must also be no delay in taking immediate action to protect people in difficulty today.
“We want all the regulators involved to immediately crack down on payday lenders who flout the rules and use their new powers to take strong, proactive action to clean up the whole of the consumer credit market.”
Michael Ossei, personal finance expert at uSwitch.com says that based on what it found, the OFT had little choice but to act. He adds: “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.”
The OFT is advising consumers to think carefully before taking out a payday loan and to be aware of their rights and where to go if they have a problem.
It adds that consumers struggling to repay debts can contact Citizens Advice for free, impartial advice on: 08454 040506 or at www.adviceguide.org.uk. Individual consumers with complaints should approach their lender in the first instance. If they are unhappy with the response, they can take their complaint to the Financial Ombudsman Service on: 0800 023 4567 or at www.financialombudsmanservice.org.uk.