According to law firm Pinsent Mason, the OFT carried out 68 property searches at the premises of payday lenders in the period January to May 2012, having only carried out one such exercise in the whole of 2011.
Property searches can take the form of a comprehensive audit of the firm’s practices, including inspecting documents, monitoring sales calls and online applications and assessing lending decisions.
Payday lenders lend amounts of up to £1000 for periods of up to one month. Opponents of payday lending argue that very high interest rates are charged, that disclosure of fees and charges is often less than transparent, that these loans can trap borrowers in a ‘debt cycle’ and that funds are sometimes advanced without adequate checking of the applicant’s circumstances.
Payday lenders must be licensed by the OFT, must comply with OFT guidance and must comply with the Consumer Credit Act.
The OFT is conducting a compliance review into the payday lending sector and is expected to report by the end of 2012. The OFT has particular concerns that lenders are offering loans without conducting affordability checks and without fully explaining the risks involved. Misleading advertising, the treatment of borrowers in financial difficulty and loans being ‘rolled over’ into subsequent months have also attracted the attention of the regulator. This review could lead to the OFT tightening its guidance for short-term lenders.
Pinsent Mason partner Ian Roberts made reference to “a few rotten apples who may give the OFT a genuine cause for concern”, but added that he believed the sector provided an important service. “Licensed payday and other short term lenders play a vital role in the market by providing funds to borrowers who would otherwise be unable to borrow funds from legitimate sources,” commented Mr Roberts.
Following pressure from the Government, four trade bodies: the Consumer Finance Association (CFA), the Finance and Leasing Association (FLA), the British Cheque and Credit Association (BCCA) and the Consumer Credit Trade Association (CCTA) all agreed in July 2012 to improve their standards for payday lending and by 26th of November 2012 at the latest. Together, these four bodies represent over 90 per cent of the short-term lending sector. The agreement has given rise to a new Good Practice Customer Charter, which members of these four bodies will be expected to comply with.
This pressure from the Government is just one of many calls for payday lending to be subject to tighter regulation. After seeing a four-fold rise in the number of people contacting the Citizens’ Advice Bureau (CAB) with debt problems after taking out a payday loan, CAB spokesman Peter Turton said in late 2011:
“The sort of regulatory regime isn’t working to protect people. The government needs to look at consumer credit and get really serious about making it more effective. We need better sorts of messages to firms that it’s not acceptable to treat people badly.”