The Office of Fair Trading has today announced that it will conduct an extensive review of the payday loan sector.

The review of 50 of the leading payday loan companies will involve on-site inspections and investigate whether the lenders are carrying out their businesses in line with the Consumer Credit Act and the OFT's own guidance to creditors on irresponsible lending.

With lending criteria looking to remain tight for the foreseeable future as well as more and more people feeling the squeeze between what they are paid, tax and inflation there is probably a chance that the more vulnerable will feel pushed into taking one of these highly priced financial products. So this is a very timely review.

The OFT will also be conducting surveys of both industry and consumer organisations. The OFT has already reviewed 50 of the lenders' websites and written to relevant trade bodies with guidance on how advertising standards can be improved.

The OFT says that the review will be focusing on the following areas of concern:

  • Giving loans without first checking adequately that the borrower can afford to repay them.
  • Inappropriately targeting particular groups of people with clearly unsuitable or unaffordable credit.
  • Rolling over loans so that charges escalate and the loans become unaffordable.
  • Not treating borrowers that get into financial difficulties fairly.

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 and not meeting the standards set out in our guidance on irresponsible lending. 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.

'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.

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.

'We look forward to seeing the findings which, where necessary, will be used to take further enforcement action and drive up standards within the industry. This includes improving consumer protections and having an open and transparent lending market.

Where a Payday lender falls short or engages in the type of 'deceitful or oppressive or otherwise unfair or improper business practices' it could call the company's fitness to hold a consumer credit licence into question.

To determine fitness to hold such a licence the OFT applies the 'section 25 test'.

1.2 All consumer credit businesses (creditors)1 are required to hold an appropriate standard consumer credit licence issued by the Office of Fair Trading (OFT)2. The OFT has a duty under section 25 of the Act to take steps to ensure that licences are only given to and retained by- those who are fit to hold them (the 'section 25 test').

Irresponsible lending – OFT guidance for creditors

In 2010 the OFT conducted a similar exercise within the debt management sector and, as a consequence, 43 companies had to surrender their licences.

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