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.