Office of Fair Trading warns payday lenders to clean up their act or face closure

Payday lenders face being shut down if they don’t clean up their act, the Office of Fair Trading (OFT) has warned.

In a damning statement the OFT said that most of the 50 major payday lenders it has scrutinised since launching an investigation earlier this year failed to comply with legal obligations and expected standards.

The OFT has told the 50 biggest firms that they may face enforcement action, which could mean putting them out of business. The Independent has been among those campaigning to crack down on exploitative lenders. The regulator has also warned the UK's 240 payday firms about growing evidence of poor practices in the sector, which sees some firms charge an annual percentage rate of more than 4,000 per cent.

Specifically the OFT accused lenders of misusing continuous payment authorities (CPA), which give lenders the power to snatch money from people's bank accounts; many do so if borrowers are late with payments. Such unscrupulous actions leave many vulnerable people unable to pay for food, rent or other basic necessities.

"Our guidance makes it absolutely clear to lenders what we expect from them when using continuous payment authority to recover debts and that we will not accept its misuse," David Fisher, of the OFT, said. One worker at a leading payday loan firm told The Independent that CPAs are set up automatically to keep trying to withdraw cash from borrower's accounts the day after they default on payment. "If a lender has details of different debit cards on file, they will try them all, which often hits the customer's credit score," the insider, who didn't want to be named, said.

The OFT also accused payday firms of failing to check whether borrowers can afford to repay the loans. Even if a lender does check affordability when people first apply for a loan, many don't then bother when a customer defaults, preferring simply to add extra charges and fees. But borrowers often default because they've lost their job or their finances are spiralling out of control. At such time they need help, not encouragement to take out further debt. An affordability check at that stage would highlight a borrower's problems.

Mr Fisher said: "We have uncovered evidence that some payday lenders are acting in ways that are so serious that we have already opened formal investigations against them. It is also clear that, across the sector, lenders need to improve their business practices or risk enforcement action."

The regulator criticised payday lenders for the high number of times they roll over loans, boosting their profits while hitting vulnerable people with excessive fees and interest charges.

The leading firms have agreed a new code of conduct where loans will not be rolled over more than four times, but lenders regularly get around this, according to the insider. "Lenders simply make the borrower pay a small amount off the debt, so they can then claim that it's a new loan," the insider said.

The OFT said its investigation into the sector is continuing and that it will publish its full findings in the new year. It refused to name any of the firms under investigation.

Abusive tweets to Mp 'traced to Wonga office'

Wonga, the online loans company, has admitted one of its junior employees may have been behind anonymous Twitter attacks on Stella Creasy, the MP and anti-payday loans campaigner.

Ms Creasy demanded an apology from Wonga last night after the Twitter account was reportedly traced to someone working within the firm's London office. The tweets had called Ms Creasy "mental", "nuts" and a "self-serving egomaniac".

The Walthamstow Labour MP has been a critic of payday loan companies, which can charge low-income customers annual interest rates of more than 4,000 per cent. Labour has called for the Lords to vote for an amendment to the Financial Services Bill to cap charges.