On March 6 2013 consumer credit regulator the Office of Fair Trading (OFT) announced the final results of its compliance review of the payday lending sector. On the same day the Financial Services Authority (FSA) launched a consultation on how one of its successor bodies, the Financial Conduct Authority (FCA) will regulate payday lending and other credit activities when it takes over responsibility for this from the OFT in April 2014.

The principal areas of concern for the OFT regarding payday lenders are:

  • Lenders not carrying out affordability assessments
  • Not explaining sufficiently clearly how payments will be collected
  • Use of “aggressive” methods to recover debts
  • The way borrowers in financial difficulty are treated

Ahead of the move to FCA regulation the OFT intends to take action. Fifty payday lenders who together comprise 90% of the market have been given twelve weeks to improve their practices or face possible OFT enforcement action. The ultimate sanction available to the OFT is to revoke a firm’s Consumer Credit Licence without which they cannot trade.

The OFT described payday lending as a “top enforcement priority,” noting that these loans are often granted to vulnerable customers and that given the high rates of interest charged the implications of irresponsible lending can be significant.

The OFT has also provisionally decided to refer the payday loan market to the Competition Commission after discovering that lenders primarily compete on how quickly the loan can be provided rather than on price.

Clive Maxwell, OFT Chief Executive 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,” and added: “Irresponsible lending is not confined to a few rogue payday lenders – it is a problem across the sector.”

According to the Treasury press release on the same subject, the Government intends to:

  • Work with the OFT and Advertising Standards Authority to improve standards of advertising amongst payday lenders
  • Consider whether independent monitoring can take place to ensure lenders are complying with their Codes of Practice
  • Press for additional requirements to be included in Codes of Practice regarding use of Continuous Payment Authority
  • Force the industry to improve data sharing, after noting that some people are taking out several loans on the same day

The FCA will regard payday lenders as higher risk than certain other types of credit firm and will require them to pay higher authorisation fees. A separate paper issued by the Treasury on March 6, says: “Urgent intervention is required in the high cost credit market, in particular in the payday lending sector,” and says that the FCA has a “commitment to prioritise action on payday lending from day one.”

The FCA has the power to cap interest rates charged by lenders but the Government is not calling for this to happen at present.

Consumer Minister Jo Swinson MP said: “The evidence of the scale of unscrupulous behaviour by payday lenders and the impact on consumers is deeply concerning.  The Government is committed to tough action to tackle these problems. The Office of Fair Trading’s (OFT) enforcement action will stop payday lenders taking advantage of those in financial difficulty. In April 2014, we are giving responsibility to regulate this industry to the FCA, who will have more rigorous powers to weed out rogue lenders.”