Payday lenders get 12 weeks to clean up act

THE payday loan industry has been called to account by the Office of Fair Trading, which has given 50 lenders 12 weeks to improve their business practices.

An investigation criticised companies that lend money over short periods of time and charge huge rates of interest, saying they are causing “misery and hardship” for borrowers.

However, campaigners called for much tougher regulations on the £2-billion-a-year industry – including a cap on interest rates.

Hide Ad
Hide Ad

OFT chief executive Clive Maxwell said: “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.

“Payday lenders are earning up to half their revenue, not from one-off loans, but from rolled-over or refinanced deals, where unexpected costs can rapidly mount up.

“Irresponsible lending is not confined to a few rogue payday lenders, it is a problem across the sector. If we do not see rapid, significant improvements by the 50 lenders we inspected, they risk their licences being removed.”

Citizens Advice Scotland is seeing 50 new cases a day of people stuck in a spiral of debt after taking out payday loans.

CAS spokesman Keith Dryburgh said: “For families struggling to make ends meet, payday loans can seem very attractive, but they have interest rates as high as 4,000 per cent.

“We also find that many lenders are not being clear about their terms and conditions, are offering loans to people without proper assessment of their income and are then pursuing debts aggressively.”

The payday loan companies introduced a voluntary code of practice last November, but the OFT investigation shows self-regulation is falling short.

Among the issues identified were lenders failing to assess affordability, failing to explain how repayments will be collected and using aggressive debt-collection practices.

Hide Ad
Hide Ad

Which? executive director Richard Lloyd said: “We want to see the regulators immediately crack down on payday lenders who flout the rules and for new powers to be used to take strong, proactive action to clean up the whole of the credit market.”

The watchdog is also proposing to refer the industry to the Competition Commission after finding “deep-rooted” problems, such as lenders encouraging customers to roll over expensive loans and sink further into debt.

Michael Ossei, personal fin­ance expert at uSwitch.com, said: “It’s great that the government is finally reacting to this, but for many consumers the action comes all too late.”

Labour MSP Kezia Dugdalesaid: “We need the Scottish Government to do something groundbreaking, like setting up a guaranteed loan fund for credit unions. … We simply cannot wait any longer to act on payday loan companies. These are legal loan sharks who are exploiting families across the country.”

However, Russell Hamblin-Boone, chief executive of the Consumer Finance Association – which represents some firms – said self-regulation was working.

“Since the industry was investigated last year, we have introduced a series of safeguards. From credit-­checking all new applications, to limiting loan rollovers and providing help for those who get into fin­ancial difficulty, we have raised standards.

“But if the government wants us to do more, we will consider its proposals.”