Watchdog to probe payday lenders

 

Britain's payday lenders are to be investigated by the consumer watchdog amid fears they are preying on those in financial trouble.

The Office of Fair Trading (OFT) will carry out spot-checks of 50 major lenders and said it would look into concerns that people are being given loans without the proper checks being carried out.

It will investigate whether firms target people unsuitable for credit and are rolling over loans so that the charges escalate and they become unaffordable.

The sector has exploded in size in recent years, with new players arriving from the United States. Analysts have suggested that the innovation shown by such lenders could see them eclipsing credit card companies.

Lenders like Wonga.com, the Money Shop and Quick Quid have gained increasingly high profiles to become household names.

The watchdog has not named the firms it plans to investigate but said the "biggest players" in the market will be under the spotlight.

Evidence gained will be used to boost standards across the industry and "drive out" any companies deemed unfit to hold consumer credit licences.

The OFT has already conducted a sweep of more than 50 payday lending websites and written to the main trade bodies outlining areas where advertising standards must be improved.

David Fisher, OFT director of consumer credit, said: "We are concerned that some payday lenders are taking advantage of people in financial difficulty, in breach of the Consumer Credit Act and not meeting the standards set out in our guidance on irresponsible lending.

"This is unacceptable. We will work with the trade bodies to drive up standards but will also not hesitate to take enforcement action, including revoking firms' licences to operate where necessary."

Mr Fisher said the payday loan sector had "grown considerably" over the last couple of years.

He said: "This, combined with the current tough economic conditions makes it the right time for us to review the industry and improve protection for consumers."

The OFT conducted a similar review of debt management firms in 2010 which resulted in 43 companies surrendering their licences and enforcement action against a further 13 businesses to revoke their licences.

The watchdog said those deciding to use a payday loan, which can often result in interest rates of several hundred per cent being charged, must understand the costs involved.

It will produce a final report and plans for follow-up action later this year.

Last month, the Government announced that payday lenders will face tougher scrutiny under the new financial regulator, with beefed up powers to act proactively and impose unlimited fines on firms which breach the rules.

They will find it harder to enter the market and will also have to undergo more rigorous checks when the Financial Conduct Authority takes control of overseeing the consumer credit market.

Restrictions in the UK so far have been considered softer than in the US, although the Consumer Finance Association (CFA), which represents businesses offering short-term loans, has argued that the industry is already "highly regulated".

The CFA has pointed to high bank charges for customers going into an unauthorised overdraft, compared with a short-term loan from one of its members, typically costing between £10 and £30 per £100 borrowed.

The trade association has said half of payday loan borrowers earn more than £19,200 and three quarters earn more than £15,000.

Some analysts believe the way in which payday lenders offer easy access to loans with transparent charges has shaken up the lending market and permanently changed the way in which consumers want to borrow cash.

But consumer groups have been urging the Government to tighten regulation of the industry.

A recent study from Shelter found that one in seven Britons has turned to credit such as a payday loan or unauthorised overdraft to help cover their rent or mortgage in the last year.

At the end of last year, insolvency trade body R3 found that 7% of people it surveyed, potentially equating to 3.5 million British adults, would be tempted to take out a payday loan over the next six months.

Consumer Affairs Minister Norman Lamb said practices which can harm "vulnerable" consumers must be uncovered.

He said: "We look forward to seeing the findings which, where necessary, will be used to take further enforcement action and drive up standards within the industry.

"This includes improving consumer protections and having an open and transparent lending market."

The Financial Ombudsman Service receives around 1,000 consumer inquiries a year about payday loans, mainly over firms' responses when people have said they are having financial problems.

Most of these are resolved, but around 200 need further investigation, the ombudsman said.

Sarah Brooks, director of financial services at Consumer Focus, said: "Payday lending is now a multibillion-pound industry, with lenders employing big advertising and sponsorship budgets.

"We have long held concerns about this market and welcome it being put under the microscope."

She said the body's own research showed problems with inadequate affordability checks and borrowers being offered multiple new loans or rollovers on existing loans.

"The situation seems to be getting worse, not better," she added.

The CFA welcomed the review, saying it would help its industry by stamping out poor quality payday lending.

The body said some payday lenders "brag" about the lack of checks they carry out, but they are not members of the trade body.

John Lamidey, chief executive of the CFA, said: "The payday lending industry has faced a great deal of criticism in recent times and we fully understand and agree with the OFT's concerns around some of the practices adopted by some players in the market.

"The CFA represents some of the largest payday lenders and we believe that our code of conduct embodies best practice and sets the standard for the industry.

"Nonetheless, our code is currently being enhanced to include many more consumer protections and this is due to be launched very soon."

He added: "We have to identify areas of malpractice and stamp it out. We know that there are payday lenders around who are less than transparent in their advertising and do not carry out the right levels of financial checks, in fact some of them brag about that, but they are not and will never be members of the CFA.

"So the OFT's review, by clamping down on poor quality payday lenders, will be good for consumers and good for our industry."

Organisations offering free debt advice can be found at http://www.direct.gov.uk.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

As in 1942, Germany must show restraint over Greece

As in 1942, Germany must show restraint over Greece

Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
Britain's widening poverty gap should be causing outrage at the start of the election campaign

The short stroll that should be our walk of shame

Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

Homeless Veterans appeal

The rise of the working poor: when having a job cannot prevent poverty
Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

Prince Charles the saviour of the nation?

A new book highlights concerns about how political he will be when he eventually becomes king
How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

How books can defeat Isis

Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
Judith Hackitt: The myths of elf 'n' safety

Judith Hackitt: The myths of elf 'n' safety

She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
The open loathing between Barack Obama and Benjamin Netanyahu just got worse

The open loathing between Obama and Netanyahu just got worse

The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
French chefs get 'le huff' as nation slips down global cuisine rankings

French chefs get 'le huff' as nation slips down global cuisine rankings

Fury at British best restaurants survey sees French magazine produce a rival list
Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

Young carers to make dance debut

What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

Design Council's 70th anniversary

Four of the most intriguing prototypes from Ones to Watch
Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

Dame Harriet Walter interview

The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
Art should not be a slave to the ideas driving it

Art should not be a slave to the ideas driving it

Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
Bill Granger recipes: Our chef's winter salads will make you feel energised through February

Bill Granger's winter salads

Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
England vs Wales: Cool head George Ford ready to put out dragon fire

George Ford: Cool head ready to put out dragon fire

No 10’s calmness under pressure will be key for England in Cardiff
Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

Michael Calvin's Last Word

Time for Old Firm to put aside bigotry and forge new links