12 weeks to change or payday lenders will be closed down

The top 50 payday lenders have 12 weeks to clean up their act or risk losing their licence to operate.

The lenders account for 90% of the market, but the Office of Fair Trading, who issued the deadline, said irresponsible lending and failure to comply with compulsory standards is widespread.

The watchdog is also set to refer the £2 billion sector to the Competition Commission after uncovering deep-rooted problems in how lenders compete with each other.

Every part of the payday loan process, from advertising to debt collection, was found to be at fault - trading to the benefit of companies and misery of vulnerable customers.

The problems ingrained in the broken market were uncovered as part of an OFT compliance report of the sector. It noted that lenders routinely:

•    Fail to conduct adequate assessments of affordability before lending or before rolling over loans
•    Don’t properly explain how payments will be collected
•    Use aggressive debt collection practices
•    Don’t offer borrowers in financial difficulty any mercy.

Customers of payday lenders are often without alternative sources of credit and are frequently in a vulnerable financial position. As a result, the rates of interest charged by can make the consequences of irresponsible lending particularly acute, the watchdog said.

Payday lenders have exploded on to the scene in recent years, with many firms becoming household names.

This has coincided with a sharp increase in the number of complaints about payday lending lodged with the Financial Ombudsman Service (FOS).

The main complaints are:

•    The loan was unaffordable and should not have been given in the first place
•    The charges that are being applied to the loan are too high
•    The loan provider will not accept a suitable repayment plan
•    Complaints from people who say they never took out a payday loan and their name and details have been used fraudulently

In nearly three-quarters of cases the ombudsman rules in favour of the customer. However, many of the enquiries received – 2,650 so far this year – never go on to become full complaints. People are often reluctant to admit they’re struggling financially, said the ombudsman.

Debt advice charities have also reported rocketing complaints figures. The Money Advice Trust (MAT) recently said that complaints about payday loans have doubled year-on-year to reach a record of 20,000 across 2012. Citizens Advice also recently handed over a dossier to the OFT of evidence it has gathered about some lenders' behaviour.

Last autumn, the OFT raised concerns that payday lenders' advertising often appears to target people who are already in trouble.

David Rodger, chief executive of national debt advice charity Debt Advice Foundation, said: “Our experience is that many people take out more and more payday loans in a desperate attempt to stave off debt – a downward spiral which can only ever make their position far worse.”

Shape up or be shut down

The OFT has now inspected each of the 50 biggest lenders and said they will have to take rapid action to address the specific concerns it identified.

Even though loans are dubbed a short-term or one-off money fix, the watchdog found that lenders' profits rely heavily on customers rolling over a loan after failing to pay back money within the initial time frame.

It added that that payday lenders are not competing with each other for this large source of re-financing revenue because by this time they have a captive market and don’t need to.

Providers were also found to compete by emphasising the speed and easy access to loans, rather than the price.  Around a third of payday lending websites looked at included statements such as "no credit checks", "loan extension guaranteed" and "extend loans up to four or five times".

The OFT said these factors distort lenders' incentives to carry out proper affordability assessments. As a result, too many people are granted loans they simply can’t afford to repay.

The 50 lenders must demonstrate within 12 weeks that they are fully compliant, or risk losing their licence and enforcement action.

The watchdog was recently handed beefed-up powers which mean it can now stop rogue firms in their tracks if it believes that consumers are in danger of harm. Before this, firms could continue to trade while they carried out lengthy appeals processes.

But it still doesn’t have the power to cap interest rates and ban or limit the number of rollovers lenders may offer.

The watchdog said the fundamental problems go beyond non-compliance with the law and regulations, which is why it’s referring the sector the Competition Commission.

The new Financial Conduct Authority (FCA), which will regulate consumer credit from April 2014, will be able to use the analysis and conclusions of the Competition Commission.

“We are proposing to refer this market to the Competition Commission, which has wider powers to get to heart of the problems in this market and to identify and impose lasting solutions that protect consumers,” said OFT chief executive Clive Maxwell.

“Irresponsible lending is not confined to a few rogue payday lenders - it is a problem across the sector. If we do not see rapid, significant improvements by the 50 lenders we inspected they risk their licences being removed. Payday lending is a top enforcement priority for the OFT.”

Four trade associations, including short-term loan trade body Consumer Finance Association (CFA), which in total represent more than 90% of the short-term or payday loan industry, put improved standards in place last autumn.

Any lender who is a member of the trade associations must abide by the rules or ultimately face expulsion.

Russell Hamblin-Boone, chief executive of the CFA, said:  “We go far beyond the legal requirements but if the Government wants us to do more, we will consider its proposals.”

The OFT is advising consumers to think carefully before taking out a payday loan and to be aware of their rights and where to go if they have a problem.

Consumers struggling to repay debts can contact Citizens Advice for free, impartial advice on: 08454 040506 or at www.adviceguide.org.uk.

Customers with complaints should approach their lender in the first instance. If they are unhappy with the response, they can take their complaint to the Financial Ombudsman Service on: 0800 023 4567 or at www.financialombudsmanservice.org.uk.