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Payday lenders given reform ultimatum Payday lenders given reform ultimatum
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Payday lenders have been given 12 weeks to change their business practices after regulators uncovered widespread evidence of irresponsible lending and breaches of the law, causing "misery and hardship for many borrowers".Payday lenders have been given 12 weeks to change their business practices after regulators uncovered widespread evidence of irresponsible lending and breaches of the law, causing "misery and hardship for many borrowers".
Following a year-long review of the £2bn sector, the Office of Fair Trading said it had found evidence of problems throughout the lifecycle of payday loans – from advertising to debt collection – and across the sector, including by leading lenders that are members of established trade associations.Following a year-long review of the £2bn sector, the Office of Fair Trading said it had found evidence of problems throughout the lifecycle of payday loans – from advertising to debt collection – and across the sector, including by leading lenders that are members of established trade associations.
It said too many people were being granted loans they could not afford to repay and it appeared that lenders' revenues were heavily reliant on customers failing to repay their original loan in full on time. In a damning report it said too many people were being granted loans they could not afford to repay, and it appeared lenders' revenues were heavily reliant on customers failing to repay their original loan in full and on time.
The OFT inspected 50 leading firms, representing 90% of the market, and said all needed to make changes to their practices. It gave them 12 weeks to do this, with the threat of losing their credit licence if they fail to comply. Although lenders insist payday loans are designed to be short-term products, and that APRs of more than 4,000% are not a fair reflection of the cost of borrowing, the OFT said almost a third of loans taken out in 2011/12 had been rolled over at least once, and these extended loans accounted for almost half lenders' revenues. Nearly 20% of revenue came from the 5% of loans rolled over four times or more.
The sector has attracted criticism from debt campaigners and consumer groups who have pointed to cases where customers have been given loans they could not afford to repay, which have quickly snowballed. The OFT inspected 50 leading firms, representing 90% of the market, and said all needed to make changes to their practices. It gave them 12 weeks to do so, with the threat of losing their credit licence if they fail to comply.
Although lenders insist they are designed to be short-term products, and that APRs of more than 4,000% are not a fair reflection of the cost of the loans, debts quickly build up if a borrower misses a payment or rolls it over into another loan. "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," the OFT's chief executive Clive Maxwell said.
The OFT said the market was not working well and that irresponsible lending may have its roots in the way competition works. Lenders compete by emphasising speed and easy access to loans, rather than better interest rates. "Payday lenders are earning up to half their revenue not from one-off loans, but from rolled over or refinanced deals where unexpected costs can rapidly mount up."
The way the market is set up means lenders may be reluctant to carry out proper affordability assessments in case they lose business to competitors, and the OFT said it would consult on referring the sector to the Competition Commission, which had stronger powers to improve the market. The sector has attracted criticism from debt campaigners and consumer groups who have highlighted cases where customers have been given loans they could not afford to repay, which have quickly snowballed. Although lenders told the OFT the average loan was £270, charities have reported typical debts of more than £1,000.
The OFT's chief executive, Clive Maxwell, 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 refinanced deals where unexpected costs can rapidly mount up." The OFT said the market was not working well and that irresponsible lending may have its roots in the way competition works. Lenders compete by emphasising speed and easy access to loans, rather than better interest rates. Lenders may be reluctant to carry out proper affordability assessments in case they lose business to competitors.
He added: "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." The OFT found that only six of the 50 firms it visited could provide documentary evidence that they had assessed consumers' disposable income as part of their affordability checks.
Maxwell said: "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."
It said it would also consult on referring the sector to the Competition Commission, which had stronger powers to improve the market.
New payday rules slammed
The report came as the government announced new rules on advertising for payday lenders, and told the sector it must improve data sharing to prevent borrowers taking out multiple loans from different firms. However, it said it would not act to cap loan costs.
Stella Creasy, the Labour MP who has been lobbying for better regulation of the sector, described the OFT's report as a "damning indictment of the government's failure to act".
"Despite three years of warnings, under [the government's] watch it is now clear legal loan sharks are out of control in Britain and our consumer credit market urgently needs meaningful reform," she said.
"For too many consumers, the only people who will lend to them at the moment are these legal loan sharks. There is no competition for their business. That is why a cap on the total cost of borrowing makes more sense than relying on affordability assessments which leave lenders to decide what consumers can pay."
Although the government is not capping charges, it has confirmed its commitment to give the power to do so to the Financial Conduct Authority (FCA), which in 2014 takes over regulation of the payday loans sector from the OFT.
Martin Wheatley, incoming chief executive of the FCA, said there was clearly growing concern about "abusive practices" in the payday loan sector. "We are keen to look at the automatic rollover of loans, the use of continuous payment authorities, and the upfront credit checks," he said.
He added that the wider credit and loans industry was one that "has not been supervised before". At the moment, loan companies have to be registered with the OFT, which has the power to revoke a firm's licence. "Our approach is a much more active supervision approach," Wheatley said. The FCA will be able to impose unlimited fines and has the power to ban firms and individuals.