The payday hunters have become the hunted. After months of examples of customers being left with their finances wrecked and their futures at risk, and an official year-long investigation, short-term lenders who hit customers with high-cost loans should come under tough new regulations, with errant firms at risk of being shut down.
The results of a year-long investigation into the sector is expected to accuse many lenders of failing to comply with the law, with the Government revealing plans to force payday lenders to clean up their advertising. They will be among a range of hardline measures aimed at stopping unscrupulous lenders taking advantage of vulnerable people in financial need.
The Office of Fair Trading (OFT) is expected to demand that high-cost lenders stop rolling over loans, leaving hard-up borrowers in a disastrous debt cycle – and it is likely to warn rogue lenders they face instant closure under new hardline rules.
The watchdog was given new powers on 19 February which allow it to immediately suspend the consumer credit licence of companies to protect consumers. It will act if it believes businesses are using practices that are deceitful, oppressive or unfair.
It is also believed to be planning to force lenders to be more stringent about checking whether people can actually afford to borrow money – and it will tell lenders to stop strong-arm tactics to recover debts, ordering them to deal reasonably with people who fail to repay loans on time.
The OFT is also likely to reiterate its warning about the misuse of continuous payment authorities. These give lenders the power to take money from directly from people’s bank accounts to pay back their loans, but such actions can leave vulnerable people unable to pay for basic necessities.
The watchdog has already warned the UK’s 240 payday firms about the growing evidence of poor practices among the short-term high-cost lenders.
Additionally, lenders could be made to include “wealth warnings” on adverts, limit the number of times they advertise and ensure their APR is displayed under new plans to be announced on Wednesday by Consumer minister Jo Swinson and Treasury minister Sajid Javid.
Ms Swinson said: “We are clear that no-one should be lured into using payday lending, and people should have the tools to make informed decisions about the help on offer. When consumers are in financial need, we are absolutely committed to making sure they are not taken advantage of.”
The Government will also publish an independent report it commissioned from the University of Bristol on the impacts of a possible cap on the total cost of credit. The report will show there are serious problems in the market which are harming consumers, although it has stopped short of calling for a cap on the cost of credit.
The Consumer minister will be calling in representatives of the industry to warn them about their future behaviour. In recent years lenders have been found targeting vulnerable groups, such as students or the unemployed, who are unable to afford to take on high-cost credit.
Mumsnet banned irresponsible payday lenders from advertising on its website last year and several university campuses have made similar moves, following a campaign by the National Union of Students.
The responsibility for regulation of consumer credit – including the payday loan sector – will move from the OFT and come under the jurisdiction of the new regulator Financial Conduct Authority (FCA) from 2014.
The Government promised the new regulator would be given new powers and sharp teeth to enforce them, while the regulator has already committed to prioritise payday regulation and advertising problems immediately.
The FCA’s rules will be binding, and if broken it will have strong enforcement powers including fines and the ability to get consumers their money back. That the Bristol report has fallen short of calling for a cap on the total cost of credit will disappoint those fighting rogue payday loans, such as the End Legal Loan Sharks campaign led by Labour MP Stella Creasy. Instead it says that a cap on credit is not the right answer at this time.
However the FCA will have powers to have another look at this and enforce a cap if they think it’s right.
Labour MP Yvonne Fovargue, who has campaigned on the subject, said there was still more work to be done. “We also need the creation of a database of real time credit information to combat the spiralling debt faced by many consumers when multiple loans are provided to customers, by different companies and in a short space of time,” she said.
‘The system fails to see some reach their wit’s end with just a £50 debt’
Graham Brewis began his career as an assistant branch manager at the Northern Rock. But drink and debt problems left him homeless. He battled back to “a normal life” but discovered that there was very little help for similar people with severe debt problems and addictions.
“I found out that the system failed to recognise that someone may be at their wit’s end with just a £50 debt,” Graham says. “A spell working for national drug charity Addaction brought me face-to-face with people with similar issues that I had dealt with. It is clearly madness to expect anyone to be successful in recovery when their finances are in a mess.”
His experience led him to set up Clean Slate Financial Wellbeing Services in 2011 in the north-east.
Dear dough: The big lenders
Typical APR 1734%
Owned by US firm CashEuroNet UK, which also owns Quick-pay-day.co.uk. In 2011, Which? reported Quick Quid to the Information Commissioner’s Office over the unauthorised sale of personal details.
Typical APR 4214%
Wonga has made six million loans since 2007 and spent £16m on advertising in 2011 to boost profits to £46m. It sponsors Blackpool and Hearts and will soon back Newcastle United.
Money Shop/Payday Express
Typical APR 2671%
Operates 350 Money Shop stores that link to Payday Express online. The company is owned by Dollar, which plans a 1200-branch network.
Typical APR 2610%
It was the biggest online payday lender when it was bought by the US payday giant Dollar Financial for a reported $195m in 2011.