Payday lenders face closure as watchdog bares its teeth
Crackdown aims to protect thousands of desperate people facing sky-high interest rates
Sunday 25 November 2012
Payday lending – short-term loans at sky-high interest rates – is now firmly in the dock. The Office of Fair Trading reckons there is widespread abuse going on and said last week it plans spot inspections for 50 providers.
If the OFT's past action with the sale and rentback industry is anything to go by, payday lenders found wanting by the OFT inspectors can expect short shrift. Sources at the watchdog have told the Independent on Sunday that credit licences could be withdrawn from offending lenders, effectively putting them out of business.
Even the Prime Minister David Cameron is wading in, suggesting that putting such firms out of business may be no bad thing. And this comes hot on the heels of the revelation that a staffer at the UK's biggest payday company Wonga, was found to have been "trolling" Labour MP Stella Creasy on twitter because she dares to campaign against payday loans.
The list of gripes relating to the expensive, short-term loans grows almost by the week. The incredibly high interest charges aside, consumer groups have long been worried by the practice of rollover loans, when a debt which is about to expire is folded within a new one, potentially ramping up the interest payable.
In addition, payday lenders have been accused of targeting the young and not making proper credit checks on borrowers.
Joanna Elson, the chief executive of the Money Advice Trust, says 17,000 people have contacted it this year in a payday loan crisis and warns: "Payday lending is an industry that requires close scrutiny.
"We have a lengthy list of concerns about the practices of many companies in the sector and we hope the OFT review will kick-start a more serious consideration of the problems payday loans create. It is clear to us that something is drastically wrong with the way these applicants are being given access to credit they can't afford to repay."
And she says that when borrowers can't afford to repay their loans many lenders are less than sympathetic: "The way in which struggling individuals are chased by payday loans companies for repayment is a cause of grave concern.
"Lenders are required by the OFT to treat their customers fairly and with forbearance if they experience difficulties. We have noted that payday lenders are particularly reluctant to negotiate sustainable repayment plans with borrowers, often refusing to freeze interest and charges, and demanding full and final settlements rather than more affordable monthly repayments."
Meanwhile the debt charity, Stepchange, which deals with thousands of consumers in dire financial straits each week, has major issues with the payday industry and wants action.
"The OFT's report shows that when statutory requirements are in place, compliance levels among lenders are much higher. But, where lenders' obligations are set out in guidance, compliance is lower," Peter Tutton, Stepchange's head of policy, says.
"There are new voluntary codes of practice set to come into effect next week. The Government needs to send a firm message that it is prepared to regulate the industry through legislation if these codes are not adequately adhered to."
The Consumer Finance Association, which represents a large number of payday lenders, says its voluntary code answers some of the concerns of critics. This sets out a cap to the number of rollover loans that can be given to borrowers and freezing interest for those in financial difficulty.
Loan repayments are meant to be transparent so that borrowers are not surprised by hidden charges and robust credit checks should be made of applicants, says Russell Hamblin-Boone, the recently appointed chief executive of the CFA.
But not all lenders are signed up to the code and this concerns Mr Hamblin-Boone: "There are some lenders out there who are failing consumers and I'd welcome regulators getting them out of the industry."
Nevertheless the CFA chides payday's critics for failing to understand the sector. "Payday exists partly because in 2007-8 banks stopped lending to large groups of people and it can be a more cost-effective way of getting a short-term loan than an unauthorised overdraft or breaching a credit card limit," says Mr Hamblin-Boone. "Many of the most vocal critics have never visited a payday lender in their lives."
But the voluntary code doesn't go far enough for many, with Citizens advice calling for an independent body to monitor compliance. As for Stepchange, Mr Tutton says payday lending firms have just "six months" to "establish a clear and convincing plan as to how they are going to reform their industry".
In particular, the charity says providers need to use "real-time and mainstream credit reference agencies", identify those who are struggling earlier and help them rather than offering more loans, limit the number of loans that can be accessed, and cap often swingeing charges.
In the meantime, though, the OFT will continue to carry out spot checks and is planning in the new year to publish its findings into whether or not to recommend legislation. Many of those firms that are, according to the OFT, guilty of "serious" abuse may not be there to see it.
Timeline of a scandal
2007 Payday lending arrives in the UK from the US, where it had been thriving for years
2008 Which? and Vince Cable, now Business Secretary, sound the alarm over the influx of payday lenders as the credit crunch bites
2009 Credit action complains to the Office of Fair Trading that payday lenders are using social networks to sell their loans, potentially targeting younger consumers
2010 The OFT publishes a "review of high-cost credit"
Feb 2012 The OFT says it will review the payday loans industry to see if there are abuses going on
Oct 2012 Newcastle United announces shirt sponsorship with UK's biggest payday lender Wonga. The move prompts protests from consumer groups
Nov 2012 OFT announces its review highlights widespread failings in the payday industry and it will inspect up to 50 providers
- 1 Fifty Shades of Grey movie trailer released: First look at Jamie Dornan as Christian Grey
- 2 Is Gideon Levy the most hated man in Israel or just the most heroic?
- 3 50 books for students to read this summer: From Ernest Hemingway to Gillian Flynn
- 4 Students offered grants if they tweet pro-Israeli propaganda
- 5 Israel has discovered that it's no longer so easy to get away with murder in the age of social media
Malaysia Airlines MH17 crash: Vladimir Putin is given 'one last chance' to end hostilities in Ukraine
The 'scroungers’ fight back: The welfare claimants battling to alter stereotypes
The truth about conspiracy theories is that some require considering
Arizona execution lasts two hours as killer Joseph Wood left 'snorting and gasping' for air
Malaysia Airlines MH17 crash: Ukrainian military jet was flying close to passenger plane before it was shot down, says Russian officer
Malaysia Airlines MH17 crash: Massive rise in sale of British arms to Russia
iJobs Money & Business
£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...
competitive: Progressive Recruitment: This really is a fantastic chance to joi...
£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...
£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...
Day In a Page
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar