In March 2013, consumer credit regulator the Office of Fair Trading (OFT) published the results of its compliance review into payday lending. Payday lenders offer small cash loans at high rates of interest over short periods, such as one month. As a result of the review, all 50 leading payday lenders in the UK have been instructed to make improvements to procedures and practices. If the lenders cannot demonstrate to the OFT within 12 weeks that they are complying with their regulatory obligations, then enforcement action will follow. The ultimate sanction available to the OFT is to remove a firm’s Consumer Credit Licence, without which they cannot trade.
The main areas of concern identified by the OFT are:
- Lenders not carrying out affordability assessments
- Not explaining sufficiently and clearly how payments will be collected
- Use of “aggressive” methods to recover debts
- The treatment of borrowers in financial difficulty
The OFT press release on the subject used some rather stark language to describe its findings, which included: “Evidence of widespread irresponsible lending”, “Too many people are granted loans they cannot afford to repay” and “Payday lenders’ revenues are heavily reliant on those customers who fail to repay their original loan in full on time.”
At the same time, the OFT announced its intention to refer the payday loan market to the Competition Commission (CC), citing “deep-rooted problems in how lenders compete with each other.” The OFT found that lenders compete mainly on how quickly they can provide the loan, rather than on price, and suggested that lenders did not carry out full affordability assessments as they feared losing business to a competitor as a result. Previous OFT referrals to the CC have resulted in fundamental changes to the marketplace, for example regarding payment protection insurance.
Clive Maxwell, OFT Chief Executive, commented: “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”
Mr Maxwell added: “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. Payday lending is a top enforcement priority for the OFT.”
The new Financial Conduct Authority (FCA) will have the power to cap interest rates charged by lenders, but the Government has resisted calls to impose a restriction on the total cost of credit.
Payday lenders are expected to comply with relevant consumer credit legislation and relevant OFT guidance such as the Consumer Credit Guidance and the Irresponsible Lending Guidance, as well as with the Code of Practice or equivalent of any trade association they belong to. Since November 2012, those lenders which are members of one of four trade associations have also had to comply with a new Good Practice Customer Charter. From April 2014, payday lenders and all other consumer credit firms will be subject to the stricter regulation of the FCA.