The Office of Fair Trading has given the leading 50 payday loan companies just 12 weeks to clean up their acts or face closure.
The threat of stripping these companies of their licences came after the OFT found that there were serious problems with how they conducted their business.
As the potential borrowers within this market are frequently vulnerable with very limited access to credit who end up paying huge amounts of interest on these loans, the OFT has made this area ‘a top enforcement priority’.
Of particular concern are:
- Inadequate assessments of lenders’ ability to pay the loans.
- Inadequate explanations on how loans would be collected.
- Aggressive debt collection practices when debtors fall into arrears.
- Failing to treat debtors who get into repayment difficulties with forbearance.
On top of that the OFT found that the payday lenders were competing with each other over how quickly and easily they could get mo9ney into peoples’ accounts, they were not competing on price to give their clients the best deal they could.
There was also little evidence that the payday lenders were competing in any sort of re-finance market to drive prices down, which is in stark contrast to the re-mortgage market for example.
According to the OTF these lenders were also found to be heavily reliant on the rolling over of existing loans from their own captive market. In fact nearly half of these companies’ revenues were derived from this practice.
So, not only are payday companies breaching the law on how they treat their customers, they are also in breach of competition law. Something the OFT intends to address by referring the market to the Competition Commission.
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.
'We are proposing to refer this market to the Competition Commission, which has wider powers to get to heart of the problems in this market and to identify and impose lasting solutions that protect consumers.
'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.'