'Legal loan sharks' ordered to clean up their act after OFT uncovers widespread irresponsible lending
Published by Max Salsbury for 24dash.com in Communities and also in Finance, Legal
The Office of Fair Trading (OFT) is giving the bulk of the payday lending sector 12 weeks to change its business practices, after it uncovered evidence of widespread irresponsible lending and a failure to comply with required standards.
Fifty payday lenders - accounting for 90 percent of the industry - have been told by the OFT that it is proposing to refer them to the Competition Commission.
Lenders that fail to adhere to the OFT's warning face losing their licences.
Payday lenders have been described as "legal loan sharks" by Stella Creasy MP, who has long campaigned for regulation of the sector.
Last year it was reported that some lenders had charged APRs of over 4,000 percent.
The OFT's compliance review of the £2 billion industry found evidence of problems throughout the lifecycle of payday loans, from advertising to debt collection, and across the sector, including by leading lenders that are members of established trade associations.
Particular areas of non-compliance discovered by the OFT 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.
The 50 lenders must demonstrate within 12 weeks that they are fully compliant. Failure to cooperate with the process will trigger enforcement action.
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 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.
The OFT's chief executive, Clive Maxwell, 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.
"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."
Commenting on the OFT's report , 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.”