On November 20, the Office of Fair Trading (OFT) published an interim report on its compliance review of payday lending. The OFT had previously indicated that it would publish the results of the review prior to the end of 2012, however final results will now be available early in 2013.
The interim results are based on:
- Inspection visits to 50 lenders
- Reviews of 50 lender websites
- Reviews of customer complaints
- A mystery shop of 156 lenders
- Survey responses from businesses, consumer groups and trade associations
The OFT says in the report that it intends to issue warnings to the majority of the 50 firms inspected. These 50 firms account for the majority of payday loans in the UK. The firms warned will be asked to provide independent audits demonstrating that they have improved their practices, and if they cannot do this to the OFT’s satisfaction, then enforcement action can be expected, with the withdrawal of a Consumer Credit Licence being the ultimate sanction available to the OFT. Formal investigations have already commenced with some lenders regarding aggressive debt collection practices.
In addition to debt collection, the OFT believes the following are areas of concern:
- the adequacy of affordability checks
- the proportion of loans that are repaid late
- the number of loans that are rolled over or re-financed
- the treatment of borrowers in financial difficulty
The OFT has written to all 240 payday lenders in the UK to highlight its concerns. Payday lender MCO Capital was stripped of its Consumer Credit Licence by the OFT in August 2012.
David Fisher, OFT Director of Consumer Credit, said: “We have uncovered evidence that some payday lenders are acting in ways that are so serious that we have already opened formal investigations against them. It is also clear that, across the sector, lenders need to improve their business practices or risk enforcement action.
Joanna Elson, the chief executive of the Money Advice Trust, who has received 17,000 enquiries in 2012 from customers of payday lenders, said: “Payday lending is an industry that requires close scrutiny. We have a lengthy list of concerns about the practices of many companies in the sector.”
In other signs that the OFT is clamping down on payday lending, law firm Pinsent Mason said that 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.
Most payday lenders are now subject to a new Good Practice Customer Charter. 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) introduced the Charter on November 26 2012. Together, these four bodies represent over 90 per cent of the short-term lending sector.
CFA chief executive Russell Hamblin-Boone explained why some people feel they need to take out a payday loan: “Payday exists partly because in 2007-8 banks stopped lending to large groups of people and it can be a more cost-effective way of getting a short-term loan than an unauthorised overdraft or breaching a credit card limit.”