Payday lenders have 12 weeks to clean up act or face being shut down, says Office of Fair Trading
OFT will also refer the payday lender industry to the Competition Commission
Simon Read is Personal Finance Editor at The Independent. He edits the Saturday Your Money section and writes the Daily Money column and Wednesday’s Midweek Money section in i newspaper. He also writes for the news and business pages of the Independent and i newspaper and is a regular money commentator on TV station London Live. He has won numerous awards including Consumer Finance Journalist of the Year.
Wednesday 06 March 2013
The Office of Fair Trading has given the UK’s much-criticised payday lenders just 12 weeks to clean up their act or be shut down. It is also planning to refer the industry to the Competition Commission.
In a damning report published this morning after a 12-month review of the sector, the consumer watchdog said its investigations revealed evidence of widespread irresponsible lending and lenders failing to comply with the standards required of them.
It proposes to refer the payday lending market – where short term loans are charged at APRs higher than 4000% - to the Competition Commission after it found evidence of deep-rooted problems in how lenders compete with each other.
Clive Maxwell, OFT chief executive, 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.”
The OFT review 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 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; and not treating borrowers in financial difficulty with forbearance.
The OFT didn’t name and shame any particular firms, but damned the whole industry by demanding that the fifty leading lenders, each of which was inspected, must take rapid action to address the OFT’s concerns.
They must demonstrate within 12 weeks that they are fully compliant, or risk losing their licence. Failure to cooperate with this process will trigger enforcement action.
“Irresponsible lending is not confined to a few rogue payday lenders – it is a problem across the sector,” said Mr Maxwell. “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.”
Gillian Guy, Chief Executive at national charity Citizens Advice said: “Payday loans are proving toxic for many people. Unscrupulous lenders are ramping up costs when customers can’t afford to repay, and are emptying bank accounts to claw back loans, leaving people without a penny to their name. What’s worrying is that these loans are often given without proper credit checks, so too many people are given loans they won’t realistically be able to pay back.
“For too long this industry has acted as a law unto itself. So it is good to see the OFT planning to remove the licences of lenders who do not improve within the 12 week deadline. But to truly protect consumers, lenders who are still found guilty of flouting guidelines must be stopped from trading straight away.”
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