Payday Lenders Given Ultimatum

March 14, 2013

Payday loan firms have been given a period of 12 weeks to change their business practices following an Office of Fair Trading (OFT) review.

The year-long review has uncovered troubling evidence of irresponsible lending and breaches of the law in the £2bn sector.

The names of the companies studied were not reported, but the OFT state that they covered 90% of all payday loans in the UK.

Many poor practices were identified, the worst problems being:

  • Lenders not carrying out  proper affordability checks before lending
  • Failure to explain how payment would be collected
  • Acting aggressively to obtain payment
  • No allowances made for struggling borrowers

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.”

The OFT said that the competitive nature of payday loans may be in part responsible for irresponsible lending, with companies competing by concentrating on speed and easy access to loans, rather than better interest rates.

Out of the 50 firms visited, only six of those could provide evidence that they had considered borrowers’ disposable income when carrying out affordability checks.

“Irresponsible lending is not confined to a few rogue payday lenders – it is a problem across the sector. 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,” Maxwell said.

The government has announced plans on how it is going to deal with bad business practices. It wants payday loan companies to face restrictions on how they advertise, and it plans to consult with the industry on a new code of practice.

Consumer Affairs Minister Jo Swinson said: “The government will work closely with the Office of Fair Trading, Advertising Standards Agency, Committees of Advertising Practice, and industry to make sure advertising does not lure consumers into taking out payday loans that are not right for them.”

The OFT undertook the review after charities reported a huge rise in complaints about payday lenders from customers.

In response to the review, the loans industry has said that it is already changing its operations. Russell Hamblin-Boone, chief executive of the Consumer Finance Association (CFA), said, “We recognise there are concerns about the industry. However, these reports are a snapshot in time, and work is already underway.”

With the new time limit set by the OFT, firms have 12 weeks left to change or risk losing their licences.