OFT demands reform in the PayDay loan market

The Office of Fair Trading or OFT have identified 50 payday lenders of committing irresponsible lending practices and failing to comply with set standards.   These companies have been given 12 weeks to change these practices or risk having their licences revoked.  The list includes leading lenders and members of established trade associations. These problems were identified during the year-long compliance review of the OFT and have been found throughout the sector and in the entire payday lending business cycle, from marketing to collection.  It has been cited that the problems seem to be deep-rooted and are mostly due to the lender's competitive practices.  The particularly alarming areas identified were their failure to adequately assess a borrower's capability to repay a loan or rollover a loan, failure to properly explain the loan's collection process, the use of aggressive collection methods, and the callous treatment of borrowers in financial difficulty. All 50 lenders were inspected individually and have been given 12 weeks to get their businesses in order and to rapidly address the problems specifically indentified to each lender.  Full cooperation is expected and failure to do so may result in the lender losing its licence. The payday lending market has been given priority by the OFT since customers here usually have limited sources of credit or are in difficult financial situations.  These situations have cultivated irresponsible lending practices and have lead many lenders to charge high interest rates. In order to entice more customers, emphasis has been given on the ease of access and the speed of approval of loans rather than the price of interest rates.  The OFT also found out that a big part of the lender's revenue comes from borrowers who are not able to pay their loans on time and in full.  Even if payday loans are considered one-off and short-term loans only, most of a lender's revenue comes from loans that last longer since loans that are rolled over and refinanced cost more.  These factors have been identified as reason for lenders to conduct affordability assessments loosely. The OFT believes that the problems are so fundamentally ingrained in the sector that it recommends a full investigation from the Competition Commission, in order to find lasting solutions that would protect customers.  The Financial Conduct Authority or FCA will be regulating all consumer credit starting April 2014 and would be in a position to take action on findings that would be recommended by the Competition Commission.  The FCA's authority, compared with the current mandate of the OFT, would be wider and more encompassing.  It would also have more resources at hand to address the problem.