Payday loan firms told to clean up act or face ban

Agencies/London

Britain’s consumer watchdog has given the UK’s biggest 50 payday lenders 12 weeks to change their business practices or risk losing their licenses, after finding evidence of widespread irresponsible lending. So-called payday lenders offer short-term loans, which are intended to be paid back when borrowers receive their wages.

Critics say they charge excessively high rates of interest and take advantage of the vulnerable in a weak economy where mainstream banks have cut back on short-term consumer lending.

The Office of Fair Trading (OFT) also said it proposed to refer the payday lending market to the Competition Commission after finding “deep-rooted” problems within an industry where annual interest rates on some loans topped 4,000%.

“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,” said Clive Maxwell, the OFT’s chief executive.

Wonga, one of the biggest payday lenders in Britain, more than trebled its earnings last year. Its annual percentage rate (APR) stands at 4,214%, according to its website.

The OFT said it had found problems across the industry in areas ranging from advertising to debt collection, including from some of the biggest lenders.

Maxwell said some payday lenders were earning up to half their revenue not from one-off loans, but from re-financed deals where unexpected costs can rapidly mount up for borrowers.

The government is considering bringing in tougher rules on how they advertise, officials said. They could face limitations on the number of television advertisements they can place in an hour and the times they can appear and will be forced to make sure their annual interest rates are properly displayed.

The Financial Conduct Authority, is to be given “new powers and real teeth” to enforce the rules which could come into effect in April next year.

“The government is introducing a fundamentally new approach to regulating consumer credit, which will ensure irresponsible firms and bad practice will have no place in the consumer credit marketplace,” said Treasury Minister Sajid Javid.

The FCA will have the power to cap interest rates and to impose a limit on the amount of new loans lenders can offer. The OFT will make a final decision on whether to refer the industry to the Competition Commission by June 2013.  The FCA’s rules will be binding and if they are broken the regulator will have tough enforcement powers including imposing unlimited fines and the ability to claw consumers’ money back.

The Money Advice Trust (MAT) recently said that complaints about payday loans have doubled year-on-year to reach a record of 20,000 across 2012.

The charity warned that “something is drastically wrong” with the way that expensive loans are being handed out to people who cannot afford them, with lenders often rolling over loans.

Joanna Elson, chief executive of the Money Advice Trust, said: “It is now vital that the industry is subject to ongoing close monitoring and that lenders adhere to clear and strict codes of conduct. We hope this review is a kick start to that process.”

Business Minister Jo Swinson said: “The evidence of the scale of unscrupulous behaviour by payday lenders and the impact on consumers is deeply concerning. The government is committed to tough action to tackle these problems. The Office of Fair Trading’s (OFT) enforcement action will stop payday lenders taking advantage of those in financial difficulty. In April 2014, we are giving responsibility to regulate this industry to the FCA, who will have more rigorous powers to weed out rogue lenders.

Stella Creasy, a Labour MP who has campaigned for strict rules governing payday lenders, said the announcements on credit checking and advertising were “ducking the real issues”. “The best way to prevent the problems payday lending causes is to cap the costs of credit, so that people do not get into debt in the first place,” she said.