OFT launches investigation into payday lending

24 February 2012

The Office of Fair Trading (OFT) has announced that it will be investigating payday lenders due to fears firms may by taking advantage of people in financial difficulty.

Payday lenders offer short-term, high-interest loans, usually on the understanding that the customer will repay the loan when they receive their next pay check.

The review will involve the OFT visiting 50 lenders to check they are complying with the Consumer Credit Act and the OFT's guidance on responsible lending.

The OFT has stated that it is concerned lenders are:

  • Giving loans without first checking adequately that the borrower can 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 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," says David Fisher, director of consumer credit at the OFT.

The OFT has the power to remove credit licences from companies that fail to stick to its rules on lending. After the 2010 review, 43 companies surrendered their licences, and action was taken against a further 13 firms to ensure their licences were removed.

Payday loan review

"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," says Norman Lamb, consumer affairs minister. "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."

However, not everyone believes the OFT is going far enough with just an investigation. Consumer Focus wants the authorities to bring in strict rules regulating the payday loan industry. "We welcome that the industry says it will develop a tougher code of conduct but the OFT must be prepared to tighten up its rules if problems remain," says Sarah Brooks, director of financial services at Consumer Focus.

"Payday loans can be convenient for some consumers but they are a very expensive way to borrow money," she adds. "If people don't pay back the loan on time they amount they owe increases rapidly – consumers should look very carefully at their options before taking out a payday loan."

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