‘Irresponsible’ payday lenders get 12 weeks to clean house

The Office of Fair Trading (OFT) also proposes to refer the payday market to the Competition Commission after finding “deep-rooted problems” in how lenders compete with each other.

The OFT found evidence that the 50 lenders, which account for 90% of the market, were failing to comply with the standards expected.

They are in danger of losing their licences, which they need in order to trade, if they fail to clean up their act.

The OFT’s report is the culmination of a wide-ranging probe into the £2 billion payday sector involving spot checks on the major lenders and an information-gathering exercise from all 240 lenders on the market.

The regulator’s review said irresponsible lending was not confined to a few rogue lenders but was found across the industry, causing “misery and hardship”.

It said that, despite payday loans being described as one-off, short-term loans costing an average of £25 per £100 for 30 days, up to half of payday lenders’ revenue comes from loans which last longer and cost more because they are rolled over or refinanced.

The OFT said lenders have a “captive market” and a full investigation by the Competition Commission is needed to potentially impose “lasting solutions” to serve customers better.

It uncovered problems throughout the lifecycle of payday loans, from advertising to debt collection, and across the sector, including those who are members of trade associations.

Some of the worst problems included lenders not carrying out proper affordability checks before lending or rolling loans over, failing to explain adequately how payments will be collected, acting aggressively to claw back debts and not making enough allowances for struggling borrowers.

The OFT said the 50 leading lenders, which were all inspected, must take “rapid action” to address the specific problems found with their businesses and must show within the next three months that they are fully compliant. Any which fail to co-operate will face enforcement action.

The OFT was handed beefed-up powers recently which mean that it can now stop lenders in their tracks immediately if it believes that consumers are in danger of harm. Previously, firms could continue to trade while they carried out lengthy appeals.

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 re-financed 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.”

The findings come as payday lenders face new rules on how they advertise under a Government clampdown to make sure that firms do not take advantage of people who are already drowning in debt.

Plans to tighten up on the industry include limiting the number of adverts firms are allowed to put out per hour, the times they can advertise and forcing them to make sure that interest rates are clearly displayed.