Member Article

OFT clamps down on payday lenders

Payday lenders are facing a clamp down on irresponsible lending and regulation breakages following an announcement from the Office of Fair Trading (OFT).

The 50 leading payday lenders, who make up 90% of the market, have been given 12 weeks to change their poor practices after a review found “deep rooted problems in how lenders compete with each other.”

Evidence was collected through inspections of the top 50 lenders, and OFT found that speed and ease of access to money was often used to attract customers, rather than price.

OFT revealed that lenders relied too heavily on roll-overs or refinancing loans, and often failed to fully explain how payments would be collected.

Lenders were also found to use aggressive tactics to collect debts, and borrowers in financial difficulty were not treated with appropriate forbearance.

Clive Maxwell, OFT’s 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 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.”

Lenders that fail to bring their standards up to OFT’s recommendations within 12 weeks will risk having their licenses revoked.

Payday firms will be expected to change their business practices, from the way they advertise to how they collect debts, and failure to cooperate will result in enforcement action.

Consumers have been advised to “think carefully” before taking out a payday loan, and to ensure they are fully aware of their rights after OFT found too many people have been given loans despite not having the funds to repay the money.

Mr Maxwell concluded: “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.”

Responsibility for consumer credit will be transfered from OFT to new regualtor the Financial Conduct Authority (FCA) from the 1st April 2014.

In addition to this announcement, the Financial Services Authority (FSA) has published a consultation on a new regime for consumer credit.

It advised there should be increased flexibility for banning products and creating new regulations, while more resource is required and FCA will need better information about firms when it takes on its responsibilities next year.

FSA said more scrutiny of high-risk lenders is also necessary, and recommended that FCA should be given more powers to make lenders reimburse wronged consumers, or ban certain firms and individuals from the market.

Martin Wheatley, FCA’s designated chief executive, said: “Consumer credit inhabits every corner of our day to day financial lives.

“We will focus our efforts on the areas of highest risk, and ensure we use our resources sensibly and proportionately.

“The work we have done with consumer groups and trade bodies has helped us reach this point and will continue to help us make the transition as smooth as possible.

“This regime is a sensible approach to everyday finances. It will give consumers the protection they expect without placing an undue burden on the firms that service them.”

This was posted in Bdaily's Members' News section by Miranda Dobson .