Payday lenders' default fees could be illegal

13 January 2014

Payday lenders could be acting illegally by charging excessive default fees, according to consumer group Which?.

In analysing the fees charged by payday lenders when borrowers are unable to make their repayments, Which? found that 10 out of 17 of the largest payday lenders imposed default fees of £20 or more. Wonga's charge was the highest at £30, while four of the 10 firms charged £25 or more.

The consumer group said that in its legal opinion, "excessive default fees are unlawful under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs)".

The rules state it is unfair for lenders to charge disproportionately high fee  to borrowers who default.

Which? said "high charges are one of the biggest factors that tip borrowers into a spiral of debt" and believes the fees should be limited to "the administrative costs associated with defaulting".

The consumer group has now written to the worst offenders to challenge the level of their these fees.

Richard Lloyd, executive director at Which?, said: "If they cannot justify why these charges are so high and refuse to cut them, we would look to take further steps to protect vulnerable consumers. The regulator must also take action to ensure all fees are fair, proportionate and only reflect lenders' costs."

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Research by the consumer group revealed 56% of payday loan customers had been charged for missed or bounced repayments over 12 months, compared to just 16% for borrowers accessing other forms of credit. Which? also found 20% of payday loan users had experienced 'unexpected charges'.

'Alarming' business practices

Meanwhile, four payday lenders and three debt collection firms reported to the Office of Fair Trading (OFT) by Citizens Advice for 'alarming' business practices have closed down.

Tooth Fairy Finance, Easy Finance Club and Community Pay Day – all part of Web Loan Processing Limited – went into administration in November 2013 after being reported to the OFT in February.

The debt collectors that were linked to the lenders – Marshall Hoares Bailiffs Limited and Northern Debt Recovery Limited - surrendered their licences; while the licence of the third debt collector, CIM Technologies Limited, lapsed in April 2013 meaning it could no longer operate.

The fourth payday lender was MCO Capital Limited, which traded as Speed Credit, and was shut down by the OFT in March 2013.

Criticism of the companies included that they took payments from borrowers' bank accounts (even after loans had been repaid), abusive and aggressive staff making frequent telephone calls, and text messages to customers.

Employees of some of the companies had even pretended to be bailiffs and threatened to enter customers' home to seize their belongings.

Citizens Advice chief executive Gillian Guy said: "This sends a strong message to unscrupulous companies that exploiting customers does not deliver a sustainable business. The sharp practices employed by these firms were particularly alarming and caused significant distress for customers.

"In some cases, people were subject to constant harassment, left seriously out of pocket and given no option to get on top of their debts. What was supposed to be a quick fix turned into a debt nightmare."

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