Payday loan firms warned over poor practices

Payday loans companies are failing to adequately check whether loans will be affordable for borrowers and have been warned by the regulator over "aggressive" debt collection practices.

The Office of Fair Trading has written to all 240 payday lenders highlighting "emerging concerns" over poor practices in the market, and has opened formal investigations into several payday lenders over how they pursue borrowers who have defaulted on their repayments.

As part of an ongoing review of the sector the OFT performed a "sweep" of 50 lenders which account for the majority of loans. This prompted it to raise concerns over the following areas: whether firms are making adequate affordability checks on loans for borrowers; the proportion of loans that are not repaid on time; the frequency with which some lenders roll over or refinance loans; and how companies treat borrowers who get into financial difficulty.

David Fisher, director of consumer credit at the OFT, said: "We have uncovered evidence that some payday lenders are acting in ways that are so serious we have already opened formal investigations against them. It is also clear that across the sector lenders need to improve their business practices or risk enforcement action.

"I would urge anyone thinking about taking out a payday loan to make sure they fully understand the costs involved so they can be sure they can afford to repay it."

The OFT has today published revised debt collection guidance focusing on continuous payment authority (CPA), a repayment mechanism commonly used by payday lenders which allows them to take payments from a borrower's debit card at any time during the month.

Lenders should not use CPA without the informed consent of the borrower or in ways that have not been agreed, and should always explain how CPA works and how it can be cancelled. Lenders should also not try to take payment where there is reason to believe there are insufficient funds in the account, nor should they continue using CPA for an unreasonable period after a scheduled payment was due.

Fisher said: "Our revised guidance makes it absolutely clear to lenders what we expect from them when using continuous payment authority to recover debts, and that we will not accept its misuse."

The OFT investigation into the payday loans market began in February 2012 and was supposed to conclude by the end of the year. But the organisation said it had collated so much information it had to make an interim announcement ahead of its full report being published in the new year.

Despite payday loans firms claiming that borrowers are generally satisfied with the service they receive, Which? recently found that half of borrowers cannot repay their loans and 70% regret taking one out.

In May 2012, the OFT told payday loan firm Wonga it must improve its debt collection practices after it emerged it had sent letters to customers accusing them of committing fraud. Wonga was told it must not send such letters again or it would face a fine of up to £50,000 for every instance of it breaking the rule.

In August 2012, MCO Capital was fined £544,505 and had its consumer credit license revoked after the regulator found it failed to check the identity of people applying for its loans. This allowed fraudsters to use the personal details of more than 7,000 individuals to successfully apply for loans amounting to millions of pounds.

The Financial Ombudsman Service said there has been a "considerable" rise in the number of payday lending complaints brought before it this year. Between April and September 2012 it received 271 new complaints, compared to the 296 it saw during the whole of the last financial year (2011-12). It is currently upholding more than eight out of 10 cases (81%) in favour of the consumer.

Complaints centred around loans being unaffordable, excessively high charges, loan providers not accepting a suitable repayment plan, and consumers who have never taken out a payday loan having their name and details used fraudulently.

Consumer groups and debt charities welcomed the OFT's interim announcement. Joanna Elson, chief executive of the Money Advice Trust, said: "Payday lending is an industry that requires close scrutiny. We have a lengthy list of concerns about the practices of many companies in the sector and we hope the OFT review will kick-start a more serious consideration of the problems payday loans create.

"Payday loans have a habit of making a bad situation worse. Many thousands of people have come to us for help after having seen their debt problem made far more serious by taking out one or more payday loans."