27 Jun 2013

OFT sends payday lenders to regulator for investigation

The £2bn payday loans industry is referred for a full-blown investigation by the competition commission over concerns that firms benefit hugely from loans that borrowers can’t pay back on time.

The trading watchdog said it decided to make the referral because it continues to suspect that features of the market “prevent, restrict or distort competition”.

The “fundamental” problems it has found, such as loans becoming far more expensive than struggling borrowers had expected, cannot be tackled by existing laws and guidance, it said.

The Office of Fair Trading (OFT) decision is the result of a large-scale investigation into the payday loans sector, including spot checks on household names such as Wonga.

The OFT said it is concerned that lenders are mainly competing on the availability and speed of loan approval, rather than how much it will cost the borrower.

“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,” it said.

“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”.

During its investigation, the OFT found that lenders get up to half of their revenue from loans which had been rolled over or refinanced.

Cap on interest rates

The commission has strong powers to ban or limit products and shake up whole markets. The tough new regulator the Financial Conduct Authority (FCA) 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.

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.”

Poor credit histories

A “significant” number of borrowers have poor credit histories and a pressing need to get access to cash, meaning that the cost of the loan may be a less significant factor for borrowers and weaken competition on price, the watchdog said.

The OFT said it is concerned that consumers find it hard to compare the full cost of payday loans.

Charities and consumer groups, many of whom have seen rocketing numbers of people struggling with payday loan debt, welcomed the OFT’s decision, although some questioned why action has not come sooner.

Martin Lewis, creator of consumer help website MoneySavingExpert.com, called for a cap to be placed on the total cost of loans and said lenders should be forced to take more notice of poor credit histories.

He said: “Finally, politicians and regulators are picking up the ball. Yet it’s shamefully late. Millions of people have already spent billions of pounds on these often disgustingly expensive debts that lead many people into financial hell.

“The lax regulation and enforcement in the UK means we’ve been easy pickings for these lenders. Couple that with the gradual diminishing of the social fund, which was the one route for people on benefits or with little cash to get short-term, interest-free loans, and it’s no surprise so many people fall foul.”