Payday lenders face severe crackdowns

By Emma Lunn

Payday lenders have 12 weeks to shape up - or risk being shut down, according to an announcement from the Office of Fair Trading.

Following a review of the controversial £2bn payday lending sector, the OFT has given 50 payday lenders, which account for 90% of the payday market, 12 weeks to change their business practices or risk losing their licences.

The move comes after the OFT uncovered evidence of what it calls widespread irresponsible lending and failure to comply with required standards.

Why are payday loans so controversial?
Payday loans
market themselves as convenient, short-term loans - and consumers pay a price for that convenience. According to the OFT, payday loans cost an average of £25 per £100 for 30 days, which equates to an APR of 4,000%. Repeated use of payday loans can trap borrowers in a cycle of debt, as failing to repay loans on time or "rolling over" loans can see charges quickly mount up. payday-loans

The OFT investigation into payday lenders' practices identified problems at every stage of the lifecycle of payday loans, from advertising, to assessing applicants' ability to afford the loans, to rolling over loans, to debt collection techniques and poor treatment of borrowers who couldn't afford to repay their loans. In fact, according to the OFT, half the sector's revenue comes not from one-off loans, but from the mounting costs that result from rolling over or re-financing loans.

OFT chief executive Clive Maxwell said irresponsible lending is not confined to a few rogue lenders -- it is a problem across the whole payday sector.

"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," Maxwell said in a statement.

What happens next?
The 50 lenders targeted by the OFT -- which have not been publicly named -- need to take action to address the specific concerns the OFT identified within each of their businesses.

"Once they receive our evidence detailing the regulations they have breached, the lenders have 12 weeks to complete an audit of all the relevant practices," says OFT spokesman Russell Guthrie. "The audit must convince us that they have made the necessary changes. If not convinced, we can look at them again, including visiting them on-site."

If payday lenders fail to become fully compliant, or don't co-operate with the OFT, they risk enforcement action, which could include losing their licence to lend.

The OFT has also suggested that it may refer the payday lending market to the Competition Commission, because of problems its investigation unearthed about the way lending firms compete with each other. Further clampdowns on the industry may come from the Financial Conduct Authority (FCA), which will take over for the Financial Services Authority in April 2014. The new watchdog agency's incoming chief executive, Martin Wheatley, said on 6 March that it would be closely monitoring the payday loan sector's practices -- and flexing its regulatory powers (which include imposing interest rate caps) when it takes over.

Good for consumers?
The clampdowns are welcome news to debt charities, which have seen increasing numbers of cases in which people are struggling with payday loan repayments.

"We are pleased to hear that the FCA will prioritise poor practice in the payday lending market when it takes over regulation in April 2014," says Caroline Siarkiewicz, head of the UK debt advice programme at the Money Advice Service. "We also hope it will use the opportunity to conduct a thorough review of the operation of the market and address some of the systemic issues such as opaque cost structures, and use of credit extension and continuous payment authorities."

Meanwhile, debt charity StepChange reported that the average amount owed on payday loans by its clients now stands at £1,657 and that increasing numbers of borrowers were struggling with multiple payday loans.

In a statement, StepChange External Affairs Director Delroy Corinaldi called the OFT report a "stark wake-up call to the payday loan industry."

"We urge the Government to ensure that in the coming year the OFT has the resources it needs to follow up this excellent compliance review with the actions needed to protect consumers," he said.

See related: Are payday loans replacing credit cards?

Published: 12 March 2013