Payday lenders told to clean up their act


Payday lenders told to clean up their act Payday lenders have been told to clean up their act after the Office of Fair Trading (OFT) found widespread examples of “irresponsible lending”.

The OFT also plans to refer the payday loan market, worth over £2 billion per year, to the Competition Commission, after uncovering “deep rooted” problems with how companies compete for business.

After investigating the largest 50 payday loan companies the OFT is giving the sector just 12 weeks to change how they do business or risk losing the licence they need to trade.

Aggressive practices

The OFT investigation covered 90% of the payday loan market and found a range of poor practices, including:

  • A failure to assess whether borrowers could repay loans
  • “Aggressive” debt collection techniques
  • A lack of understanding and forbearance when borrowers ran into difficulty making repayments
  • A failure to explain how repayments are collected

There was also concern that the high interest rates charged by payday lenders could compound the effects of irresponsible lending, with many borrowers being offered loans they are unable to repay. According to their website,, perhaps the most high profile payday lender, charges a representative interest rate of 4,214% with many of their rivals charging in excess of 1,500% per year.

Clive Maxwell, the OFT’s Chief Executive, said: “We have found fundamental problems with the way the payday market works and widespread breaches of the law and regulations, causing misery and hardship for many borrowers.”

Despite the fact that payday loans are designed to be short term, many actually last significantly longer, with borrowers rolling over loans a number of times. Clive Maxwell again: “Payday lenders are earning up to half their revenue not from one-off loans, but from rolled over or refinanced deals where unexpected costs can rapidly mount up.”

Government crackdown

At the same time as the OFT published their report, the government has said it will crackdown on payday lenders with a series of new regulations.

The new rules will include restrictions on how lenders can advertise and a code of practice with which they must comply.

However, despite calls from politicians of all sides and leading personal finance experts, the government has decided against a cap on the interest rate which payday loan companies can charge; although the new financial regulator, the Financial Conduct Authority (FCA), will have the power to impose a cap from April 2014 when they start to regulate the sector.

Reacting to the news Richard Lloyd, Executive Director at Which?, said: “The referral of the payday market to the Competition Commission is a good move. But there must also be no delay in taking immediate action to protect people in difficulty today.”

Whilst Joanna Elson, Chief Executive of the Money Advice Trust, who are reporting 20,000 complaints about pay day lenders in 2012, said: “It is now vital that the industry is subject to on-going close monitoring and that lenders adhere to clear and strict codes of conduct. We hope this review is a kick start to that process

Responding to the OFT report and government proposals the Consumer Finance Association, which represents payday lenders, said that change was already taking place, with moves to address issues of affordability, limit the number of times a loan can be rolled over and introducing credit checks for all applicants.