OFT begin investigation into payday loan firms

Saturday, 25 February 2012 12:17

By Ben Salisbury

The Office of Fair Trading (OFT) is to launch an investigation into the payday loans industry.

Lenders who charge hogh interest rates for short-term credit could have their licences revoked if they are found to be treating customers unfairly or taking advantage of customers in financial difficulty.

The number of payday loans issued has quadrupled since the credit crunch as individuals have struggled to access credit from traditional means and levels of disposable income have dropped sharply. Wages have not grown at the same rate as inflation and unemployment has also increased, resulting in an increase in demand for payday loans.

The OFT will visit 50 lenders to check that they are lending money to appropriate people who can afford to repay the loans and to make sure that they are not offering loans to customers who already have an outstanding payday loan that has not been repaid.

The OFT’s investigation will look at whether payday loan firms are complying with the Consumer Credit Act and whether they are trying to take advantage of people in financial difficulty.

The review will involve individual visits to 50 leading payday loan companies and surveys of industry and consumer organisations. The OFT has already conducted a sweep of the websites of the companies and has written to trade bodies outlining areas where it believes advertising standards could 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. 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. “

An earlier investigation by the OFT in 2010 concluded that payday loan lending firms offered a useful service to some people who may not be able to access credit in any other way.

However, the recession and pressure on household finances has seen an increase in the number of people using such firms and has pushed the issue back into the spotlight, as has the problems identified by consumer groups such as Which? and Consumer Focus.

“The payday sector has grown considerably since the OFT's high cost credit review in 2010. This, combined with the current tough economic conditions makes it the right time for us to review the industry and improve protection for consumers,” added Mr Fisher.

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Which? Chief Executive, Peter Vicary-Smith, said: "Which? found widespread poor practice in the payday loans market when we investigated it last year, so we're pleased the OFT plans to review the sector. All too often, we found firms making misleading claims about APR, suggesting customers borrow more than they need and then encouraging them to rollover existing loans for several months. We also found several potential breaches of the Consumer Credit Act.

"The OFT must take tough action and deal firmly with any payday lenders that it finds breaching the rules."

Payday loan companies offer short-term loans that are supposed to be repaid within a month to limit the interest that is charged on the loan. The previous OFT investigation did not agree limits on interest rates charged by payday lenders.

Joanna Elson, Chief Executive of the Money Advice Trust, said: “We have witnessed the growth of the payday loans industry through a sharp increase in calls for help to National Debtline. Just two years ago National Debtline was receiving around 150 calls per month from people with payday loans, that figure has now ballooned to 1,100.”

The OFT’s investigation will look at whether specific groups of people with an unsuitable credit profile such as students, or the unemployed are being targeted for the loans.
The regulator will check whether lenders assess the borrower’s ability to repay before they lend the money and whether payday loan companies encourage borrowers to ‘rollover’ the loans and incur higher levels of interest.

Sarah Brooks, Director of Financial Services at Consumer Focus said: “Our research showed problems with inadequate affordability checks and borrowers being offered multiple new loans or roll-overs on existing loans, and the situation seems to be getting worse not better.”

Consumer Affairs Minister Norman Lamb said: “The OFT is right to launch a compliance review of its guidance in the payday lending market to make sure that companies are adhering to agreed standards and in particular to identify those practices which can harm vulnerable consumers.”

The OFT can enforce its findings and recommendations as it has the power to remove credit licenses from companies if it finds them in breach of the rules. After the previous review 43 companies voluntarily surrendered their licences and 13 more were found to be in breach of the rules and had their licenses removed.

The OFT advises people who are considering using a payday loan company to make sure they understand the costs and charges before they do so and recommends that people who are worried by their finances should seek independent financial advice.

If you are worried you can find a list of organizations that offer free help and guidance on money matters here.

Sarah Brooks from Consumer Focus warned potential borrowers against payday loans saying, “Payday loans can be convenient for some consumers but they are a very expensive way to borrow money. If people don't pay back the loan on time the amount they owe increases rapidly – consumers should look very carefully at their options before taking out a payday loan.”

The final report of the review together with information on follow up action will be published later in the year.

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