Reuters/London
Britain’s consumer watchdog must get tough on unscrupulous short-term lenders that target low earners with loans they cannot afford to repay, a parliamentary committee said yesterday.
The Public Accounts Committee (PAC) said bad practices by some of these firms were costing already hard-pressed borrowers at least £450mn a year.
So-called payday lenders, which offer loans that are repaid when borrowers get their wages, have grown rapidly in Britain as banks cut back on short-term credit after the 2008 financial crisis.
But they have been criticised for charging sky-high interest rates and for shoddy treatment of customers.
The committee’s call for a crackdown on some of the firms follows its review of how effectively Britain’s consumer lending industry, worth £176bn a year, is regulated.
Committee chairwoman Margaret Hodge said some lenders used predatory techniques to target vulnerable people on low incomes, encouraging them to take out loans which, when rolled over with extra interest, spiral rapidly out of control.
She said the regulator, the Office of Fair Trading, had been ineffective and timid in its handling of the sector.
The OFT had never fined any of the 72,000 firms in the market and very rarely revoked a company’s licence, Hodge said.
In response, the OFT said it had taken “strong, targeted action to tackle the areas of greatest risk to consumers”.
The OFT said its powers were limited and that it was only able to impose fines in very limited circumstances.
In March, the OFT gave Britain’s biggest 50 payday lenders 12 weeks to change their business practices or risk losing their licences after finding evidence of irresponsible lending.
The watchdog said yesterday it had since closed down three of the lenders and opened formal investigations into three others.
Industry body the Consumer Finance Association (CFA) said the larger lenders had already been working closely with the regulator and the government to improve standards and address many of the issues highlighted by the PAC.
“We have established an independent body to monitor and enforce our standards and support any efforts to drive out rogue lenders and the worst offenders,” CFA chief executive Russell Hamblin-Boone said.
Wonga, one of the biggest payday lenders in Britain, more than trebled its earnings last year. Its annual percentage interest rate is listed on Wonga.com as 4,214%.
The firm has said it makes stringent checks on borrowers and turns down two thirds of applications. It has called for tighter control and regulation to stamp out the worst practices within the industry.
The parliamentary committee said annual percentage interest rates were misleading to borrowers and should be replaced by a legally required statement of the total amount borrowers must repay.
It also recommended the OFT increase licence fees it charges lenders to provide more money for regulating them.