Payday lenders face official crackdown after watchdog exposes 'deep-rooted' problems

Payday lenders have been referred to the Competition Commission after the Office of Fair Trading uncovered what it called ‘deep-rooted’ problems within the industry.
The OFT said it had made the referral because it suspects payday lenders of engaging in practices that ‘prevent, restrict or distort competition.’
The watchdog found ‘fundamental’ problems within the industry including loans becoming far more expensive than struggling borrowers had expected, which it said could not be dealt with by existing laws.

Investigation: Payday lenders like Wonga face an investigation by the Competition Commission

The OFT decision comes after a large-scale investigation into the £2billion industry, including spot checks on household names such as Wonga.

 

It comes just days after Thisismoney revealed Wonga had hiked the annual interest it charges on loans from an already astronomical 4,214 per cent to a truly gargantuan 5,853 per cent.
But the payday lender claimed the rise was a sign borrowers are paying less.
The whopping increase in Wonga's annual percentage rate - the rate which represents the yearly cost of holding the debt -  was down to the average loan period falling. The company said that the period of time that borrowers are taking to repay its loans has fallen from an average of 30 days to 15.
The OFT meanwhile pointed to the fact that lenders are competing on availability and speed of loan approvals, rather than how much such loans will ultimately cost borrowers.
It said: ‘The competitive pressure to approve loans quickly may give firms an incentive to skimp on the affordability assessment which is designed to prevent irresponsible lending and protect consumers.
‘The OFT is also concerned about business models that appear predicated on making loans which are unaffordable, leading to borrowers paying far more than expected through rollovers, additional interest and other charges’.

WHAT A REFERRAL TO THE COMPETITION COMMISSION MEANS

The Competition Commission has previously intervened to get to the heart of problems like the Payment Protection Insurance mis-selling scandal.
Unlike the Office of Fair Trading, the Commission can impose direct remedies on markets if it finds issues which are stifling competition and mean consumers are paying over the odds.

The OFT can refer markets to the Commission for an in-depth investigation under the Enterprise Act.

The Commission can then decide whether any feature or combination of features in a market prevents, restricts or distorts competition.

The Commission can free up competition by either taking direct action itself or recommending that other bodies do something.
It has previously stepped in to prevent a repeat of the harm done to consumers by the PPI mis-selling scandal.
PPI is the most-complained about product that the financial ombudsman has ever seen and more than £16billion has been put aside so far by the industry to compensate consumers.
The Commission recommended severe restrictions on the sale of PPI policies, including stopping lenders from selling the insurance at the same time as granting a loan.

Clive Maxwell, OFT chief executive, said: ‘Competition appears not to be working properly in the payday lending market, allowing firms to profit from making loans that cannot be paid back on time.
‘We have seen evidence of financial loss and personal distress to many people.
‘The Competition Commission can now conduct a detailed investigation to get to the root causes and, if necessary, use its far reaching powers to fix the payday lending market.’
The OFT identified four specific areas of concern, namely that:

• Current practices make it difficult for consumers to identify or compare the full cost of payday loans, undermining competition over price for loans.
• There are barriers to switching between lenders when loans are rolled over that prevent other lenders competing for business.
• There are variable levels of compliance with relevant laws and guidance leading to firms that do invest time and effort complying being at a competitive disadvantage to firms that do not.
• A significant proportion of borrowers have poor credit histories, limited access to other forms of credit while borrowers often had a ‘pressing need’ to borrow. The cost of the loan may therefore be a less significant factor for borrowers, which may weaken competition on price between lenders.

The Commission has powers to ban or limit products and shake up whole markets. Tough new regulator the Financial Conduct Authority will oversee the market from next April.
The FCA's powers will include the ability to place a ‘possible cap’ on interest rates and ban or limit the number of rollovers lenders are allowed to offer, the OFT said.
Mr Maxwell told BBC Radio 4's Today programme: ‘We think there are fundamental problems in this market. In short, competition isn't working. It's allowing firms to profit from making unaffordable loans that can't be repaid on time, which is causing financial loss and distress to some people.
‘The sorts of difficulties we've found include difficulties for borrowers to compare the full costs of loans in some circumstances and the difficulties for borrowers to switch lender at the point of rolling over a loan.
‘We don't think changes can be made under existing laws and guidance. Rather, we think that the Competition Commission in looking at this can bring forward solutions if it finds problems.
‘It could, as it has in other markets, ban a particular product or a feature of a product to make that market work more effectively.’

High street: Pay day lenders have opened up on town centre high streets up and down the country in the last five years

Stella Creasy, the Labour MP for Walthamstow, who has led a campaign against the payday lending industry for the past two years welcomed the OFT referral.
She said: 'I'm pleased the OFT has referred legal loan sharking to the Competition Commission for investigation- it’s time to end the myth that there are a few bad apples and recognise the way the entire industry works is causing problems for millions of British consumers.
‘The Commission can look not just at individual companies, but what a lack regulatory measures such as a cap on the cost of credit does to the affordability of loans.
‘Now that this inquiry will happen, I also hope those promoting these companies will also support a moratorium on doing so until we know the outcome of the Competition Commission's investigations.
'Given the debt and misery involved for those affected by this unfair market its time to put the needs of British consumers first'
Charities and consumer groups, many of whom have seen rocketing numbers of people struggling with payday loan debt, also welcomed the OFT's decision, although some questioned why action had not come sooner.
Citizens Advice chief executive Gillian Guy said its evidence has found that in two-thirds (64 per cent) of cases loans come without any checks to make sure the borrower can afford to repay.
She said: ‘The industry is in desperate need of a transformation from predatory firms to a

PAYDAY LENDERS BY THE NUMBERS

240: The number of payday lenders in the market
£2billion: The estimated worth of the sector
50: The number of payday lenders that were warned by the trading watchdog to get their house in order or face being shut down
12: The number of weeks the Office of Fair Trading gave lenders to show they had addressed the problems it had found
30: The number of payday lenders' websites that emphasised speed and quick access to cash over cost out of the 50 looked at by the OFT
£270: The typical size of a payday loan
12 or more: The number of consecutive rollovers some payday customers had in the most severe cases found by OFT inspectors
17:  The number of lenders out of the 50 inspected by the OFT that were found to actively promote rollovers in marketing material or at the point of sale as a "feature" of the loan
50: The percentage of payday lenders' revenues that the OFT found came from 28 per cent of loans which are rolled over or refinanced at least once
19:  The percentage of payday lenders' revenue that came from 5 per cent of loans which were rolled over or refinanced four or more times, according to the OFT's findings.
38: The number of lenders out of the 50 inspected by the OFT that failed to comply with at least one of the complaint-handling rules of the Financial Ombudsman Service
7,221: The number of people who sought help from debt charity StepChange last year who had five or more payday loans
5,853: The APR (annual percentage rate) advertised on loans from Wonga

responsible short-term credit market.’
Richard Lloyd, executive director of consumer group Which? said the market is ‘rife with poor practice’.
He said: ‘This is a market where lenders are not competing fairly with each other on price but instead use speed and ease of access to entice customers into deals they cannot afford, so it is right to get the Competition Commission to investigate.
‘People under financial pressure being given high cost loans in minutes without proper affordability checks is a recipe for disaster.’
Delroy Corinaldi, external affairs director at debt charity StepChange said: 'Our evidence points to widespread structural problems in the payday lending market and this investigation is crucial to establishing whether the payday loan market itself is causing unnecessary harm to consumers.
'There are a number of questions that this investigation needs to establish answers to, including whether the payday loan industry is making excessive profits at the expense of responsible lending.
'However, today’s decision cannot be used as an excuse by regulators to postpone dealing important areas where the payday loan industry is failing consumers.
'This investigation needs to work in parallel with actions to address problems we are seeing now, including widespread irresponsible lending and aggressive debt collection measures'.
Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents the major short-term lenders operating in the UK, said:  'The CFA and its members have always supported well-designed, well-implemented regulation in order to protect consumers and drive up standards. 
'However, no other sector has faced such intense scrutiny in such a short space of time. We would have preferred the inquiry to have been deferred to allow the significant improvements that lenders have made to take effect before the industry faced further judgement.
'We urge the Competition Commission to take this into consideration during its inquiry.'