OFT Launches Review into Payday Lending
The OFT has launched an extensive review of the payday lending sector. This is in part prompted by concerns that some payday lenders may be taking advantage of people in financial difficulty.
The review will investigate compliance with the Consumer Credit Act and the OFT’s guidance on irresponsible lending. Evidence gained during the review will be used to boost standards across the sector and to drive out companies that are not fit to hold consumer credit licences.
There are a number of issues of concern that the OFT will focus on during the review, including:
Giving loans without first checking adequately that the borrower can afford to repay them.
Inappropriately targeting particular groups of people with clearly unsuitable or unaffordable credit.
Rolling over loans so that charges escalate and the loans become unaffordable.
Not treating borrowers that get into financial difficulties fairly.
The review will involve on-site inspections of 50 major payday lenders and surveys of industry and consumer organisations. Leading up to the review the OFT has conducted a sweep of over 50 payday lending websites and written to the main trade bodies outlining areas where it considers advertising standards need to be improved.
The review is in addition to and supports the OFT’s previous enforcement action within the payday lending sector. For example, requirements were imposed on CIM Technologies Limited, trading as ‘Toothfairy Finance’ in November 2010.
In 2010 the OFT conducted a similar compliance review of the debt management sector which resulted in 43 companies surrendering their licences and enforcement action against a further 13 businesses to revoke their licences.
David Fisher, OFT Director of Consumer Credit, said: “We are concerned that some payday lenders are taking advantage of people in financial difficulty, in breach of the Consumer Credit Act and not meeting the standards set out in our guidance on irresponsible lending. This is unacceptable. We will work with the trade bodies to drive up standards but will also not hesitate to take enforcement action, including revoking firms’ licences to operate where necessary.
“The payday sector has grown considerably since the OFT’s high cost credit review in 2010. This, combined with the current tough economic conditions makes it the right time for us to review the industry and improve protection for consumers.”
Consumer Affairs Minister Norman Lamb said, “The OFT is right to launch a compliance review of its guidance in the payday lending market to make sure that companies are adhering to agreed standards and in particular to identify those practices which can harm vulnerable consumers.
“We look forward to seeing the findings which, where necessary, will be used to take further enforcement action and drive up standards within the industry. This includes improving consumer protections and having an open and transparent lending market.”
The OFT is also advising people who decide to use a payday loan to make sure they understand the costs and charges first. People who are worried about their financial circumstances should seek independent debt advice.
The final report of the review together with information on follow up action will be published later in the year.
The OFT has written to the following trade bodies to outline its concern over advertising: British Cheque and Credit Association (BCCA), Consumer Credit Association (CCA), Consumer Credit Trade Association (CCTA), Consumer Finance Association (CFA), Finance and Leasing Association (FLA), National Pawnbrokers Association (NPA).
The Consumer Credit Act 1974 (as amended) requires businesses offering credit, lending money or involved in activities relating to credit or hire to be licensed by the OFT.
The OFT’s irresponsible lending guidance was published in March 2010 (updated February 2011). The guidance outlines the standards expected of consumer credit businesses including payday lending companies and states that they should make an assessment of affordability before granting loans.
The guidance also highlights that creditors should treat borrowers fairly and with forbearance if they experience difficulties repaying their loans. Similarly, the guidance sets out examples of irresponsible lending practices which, if engaged in, would call into consideration the fitness of the business concerned to hold a CCL.
The review will also cover compliance with other OFT guidance and legal obligations where relevant.
The OFT considers a ‘payday loan’ to be a short-term, high interest, unsecured loan, typically repaid by the time/when the borrower receives his next regular income payment (normally on or around/within 30 days of having been granted the loan). References to a ‘payday lender’ are references to businesses which offer these types of loans.
The OFT published its High Cost Credit Review in June 2010 and published its Debt Management Review in September 2010.