The Office of Fair Trading (OFT) has today launched a review of the payday lending sector. The review follows a damning Which? Money investigation last October.
The OFT said it has concerns that some payday lenders may be taking advantage of people in financial difficulty and that it aims to drive out companies deemed unfit to hold a consumer credit licence.
OFT review of payday loan market
The review will investigate:
- Giving loans without adequate checks that the borrower can repay them
- Inappropriately targeting particular groups of people with unaffordable credit. When our researchers took out a small payday loan for a Which? Money investigation into payday loans, several were offered much bigger loans the following month, even though they had neither requested nor shown any interest in further loans. Interest rates (APRs) of around 1,700% are common for payday loans.
- Rolling over loans so that charges escalate and the loans become unaffordable. In our research, some borrowers were encouraged to extend the term of their payday loan, often for several months.
- Not treating borrowers that get into financial difficulties fairly.
The Which? Money investigation also uncovered poor privacy provisions. In one case, within days of making his application our researcher had received 47 unsolicited emails and numerous phone calls from payday loan, impaired-credit and claims management companies.
What will the payday loan review involve?
The OFT will conduct on-site inspections of 50 major payday lenders, as well as surveys of industry and consumer organisations. It has already written to the main trade bodies outlining areas where it considers advertising standards need to be improved.
In 2010, the OFT conducted a similar compliance review of the debt management sector which resulted in 43 companies surrendering their licences and enforcement action against a further 13 businesses to revoke their licences.
David Fisher, OFT Director 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.’
Which? welcomes OFT payday loan review
Which? chief executive, Peter Vicary-Smith, has welcomed the review into the payday loan market. He said: ‘Which? found widespread poor practice in the payday loans market when we investigated it last year, so we’re pleased the OFT plans to review the sector.
‘All too often, we found firms making misleading claims about APR, suggesting customers borrow more than they need and then encouraging them to rollover existing loans for several months. We also found several potential breaches of the Consumer Credit Act. The OFT must take tough action and deal firmly with any payday lenders that it finds breaching the rules.’
‘Which? would urge the OFT to also address the poor privacy provisions and lax website security common in this market. Borrowers need to know what will happen to their data when they sign up for a loan, and that data must be protected.’
- Payday loans – designed to trap you in a cycle of debt? – have your say with Which? Conversation
- How to deal with debt – the best places to get free, impartial debt advice
- Which? Money Helpline – if you’re struggling to access or repay affordable credit, give us a ring