The Office of Fair Trading (OFT) has ramped up its investigation into payday loan firms, as it emerged that profits at Wonga, Britain's biggest short-term lender, soared 300 per cent in the last year.
Earlier this year the OFT agreed to investigate the payday loans industry after a long-running campaign by The Independent. Figures published today show that the OFT is being true to its word, having sent investigators to the offices of 68 business offering payday loans in the first five months of 2012, compared with just one in the whole of 2011.
Meanwhile, Wonga made pre-tax profits of £59.2m in 2011 – more than four times the previous year's figure of £14.1m.
Wonga's success in offering loans at APRs of up to 4,000 per cent has encouraged a wave of copycat firms. Many operate outside the law, encouraging people to build up debt they can't afford. It is these that are the focus of the OFT's continuing probe into the payday loan sector. It is investigating accusations that many high-cost, short-term lenders prey on vulnerable people, such as the unemployed or those on benefits.
The OFT is looking into claims that payday lenders are acting irresponsibly by handing out loans without checking whether borrowers can afford to repay them. The watchdog is also focusing on the practice of rolling over loans, so that those who fail to repay on time quickly end up with unaffordable rising debt.
During its raids, the OFT has been questioning payday lenders about how they treat borrowers who get into difficulties amid growing evidence that they do not treat them fairly.
It wants to ensure they are complying with the law and are fit to hold a consumer credit licence.
The raids were made under the Consumer Credit Act's formal power of entry, according to the law firm Pinsent Masons, which uncovered the office search figures.
The searches allow OFT or trading standards officers to access premises to observe how the business is run, as well as inspect a business' documents.
The raids often include monitoring and recording telephone calls, online applications and lending decisions.
The Pinsent Masons partner Ian Roberts said: "Going to a business and searching through its files is one of the most intrusive forms of action the OFT is able to take. It's a sign of how pro-active the OFT's approach is towards payday lenders."
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