PAYDAY lenders are to be probed by the Competition Commission after an industry watchdog raised “deep-rooted concerns” over how lack of competition in the market was affecting the price of loans for borrowers.
The Office of Fair Trading (OFT) warned that it suspected features of the payday lending market left consumers open to difficulties in identifying or comparing the full cost of payday loans.
It also said that the desperate need of some borrowers to obtain money may mean the cost of the loan is a “less significant factor”, meaning that companies felt no need to compete on costs.
“Competition appears not to be working properly in the payday lending market, allowing firms to profit from making loans that cannot be paid back on time,” said Clive Maxwell, OFT chief executive. “We have seen evidence of financial loss and personal distress to many people.”
Consumer groups calling for a major crackdown on the industry, which can see borrowers charged interest of as much as 4,000 per cent on short-term loans, welcomed the probe but warned that rapid action needed to be taken to protect borrowers.
“It’s clear that many payday lenders have been operating irresponsibly for some time, and have been taking advantage of vulnerable people, making their financial situation even worse,” said Keith Dryburgh, policy manager at Citizens Advice Scotland, which is currently carrying out an investigation into payday loans in Scotland.
“It has been clear for some time that the industry needs to clean up its act. ‘Business as usual’ is just not an option.”
He added: “The industry promised last year to stamp out bad practice voluntarily with a new code of conduct, but we have been monitoring the experience of borrowers since then, and it is clear that many of the problems are continuing. So that’s why we support the OFT’s action today.”
The OFT said it would continue to use the powers it has to crack down on payday lenders that breach the law or OFT guidance while the Competition Commission carries out its investigation.
Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents the major short-term lenders operating in the UK, said: “We would have preferred the inquiry to have been deferred to allow the significant improvements that lenders have made to take effect.”
Paying the price for fast access
Payday loans are short term loans – so-called because operators essentially lend money “until payday”, when, in theory, the borrower pays the money back.
Because of the short-term nature of these loans, many lenders charge very high rates of interest – in some cases as high as 4,000 per cent.
Borrowers can often access money from payday lending companies very quickly – and do not need to have collateral for the loan, such as a property.
In the past three years the payday market has grown from £900 million to £2.2 billion as more people discover their finances are squeezed and find it more difficult to make ends meet for everyday expenses.