OFT blasted over "ineffective" payday loans regulation
The regulator responsible for policing the payday loans industry has been "ineffective" in regulating the market and been "timid rather than tough", a committee of MPs said in a report published today.
The Public Accounts Committee (PAC), led by chairwoman Margaret Hodge, strongly criticised the Office of Fair Trading for failing "to proactively identify risks of malpractice, relying instead on complaints from consumers and information from other third parties."
The PAC also blasted the OFT for never having fined any of the 72,000 firms with a consumer credit licence or revoking any licenses completely, as well as not investing enough in regulation.
The consumer credit market has traditionally comprised of mainstream lenders such as credit card providers, but since the financial crisis other types of lenders have mushroomed – most notably payday loans firms and doorstep loan operators.
The PAC said the OFT had failed to get to grips with the "disgraceful practices" used by some of these firms.
"Predatory techniques" identified by the PAC included firms encouraging customers to take out loans which, when rolled over with extra interest, rapidly become out of control debts.
Some lenders have also been criticised for charging excessive late payment fees and sky-high interest rates of 4,000% or more, while some have been found to have wrongly taken money from non-customers' accounts.
But the OFT has "revoked very few licences, and the process can take up to two years, leaving consumers unprotected from poor practice," the report read.
The OFT gains much of its income from the licence fee it charges lenders, but the PAC said these are "ridiculously low and unrelated to the size of the business". It means that a large credit card company pays the same £1,075 fee as a small car dealer that provides credit. Had the OFT charged more it could have "raised its game as a regulator".
Hodge said: "The Office of Fair Trading has been ineffective and timid in the extreme. It doesn't understand the market – how much each firm lends and who its customers are - and can't be certain if directors of companies that have run into trouble are now running other companies. The regulatory regime must stop tiptoeing round the problem."
In 2014 the OFT will cease to exist and consumer credit regulation will pass to the Financial Conduct Authority (FCA). Hodge said the FCA needs "better intelligence and a willingness, when hearing of poor practice by lenders, to crack down swiftly with tough sanctions."
In March the OFT gave 50 payday lenders a 12-week deadline to change their behaviour or risk losing their consumer credit license. Hodge said this was an "encouraging step".
The OFT was quick to defend the accusations. A spokesperson said: "'Far from being timid, the OFT has taken strong, targeted action to tackle the areas of greatest risk to consumers. In the last financial year alone the OFT has revoked the licences of some of the UK's largest credit brokers and debt management firms, and taken formal action in more than 85 other cases.
"Around 100 debt management companies have also left or been refused entry to the market since 2011, and the leading 50 payday lenders have recently been given 12 weeks to change their business practices or risk losing their licences. Both cases follow proactive reviews of entire sectors."
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.