A press release from the OFT today details its findings following a review of the pay day loan market and its providers. As a result of those findings 50 payday lenders are being given 12 weeks to clean up their business practices or they risk losing their licences following findings of widespread irresponsible lending and an endemic failure to comply with the standards required of them.
The payday loan market was estimated to be worth a staggering £2 billion in 2011/2012 which equates to between 7.4 to 8.2 million new loans yet the failures identified by the OFT permeate the cycle of the payday system from advertising to collection and enforcement. Particular areas of none compliance are failure to conduct adequate assessments of affordability before lending, failure to provide adequate explanation of collection, aggressive debt collection practices and not treating customers in financial difficulty with forbearance.
Lenders were found to emphasise speed and ease in obtaining the loan rather than price and there was a heavy reliance on rolling over or refinancing loans. The clear message is that too many payday lenders are providing loans to people who cannot afford to repay them and revenue for this sector is too heavily reliant upon those very customers who fail to repay on time. Despite being marketed as a short term one off solution to cash flow problems up to 50% of lender revenue comes from loans which are rolled over or refinanced.
The OFT's concerns are that there is no genuine competition amongst providers and that this warrants a full investigation by the Competition Commission in order to try and ensure this market serves its customers better. The Financial Conduct Authority (FCA), who will regulate consumer credit from April 2014, will also have the power to cap interest rates and limit the number of rollovers lenders may offer or ban them completely.
The OFT has made it absolutely clear that they are not targeting a few rogue lenders but the payday sector at large and that the time has come for it to get its house in order. These findings and the involvement of the Competition Commission and the FCA may just change the make up of this industry forever.
By Kathryn Maclennan