Payday lenders have come under the spotlight again with the debate raging over how to solve the “deep-rooted” problems discovered by regulator the Office of Fair Trading (OFT).
The trading watchdog said the problems it found go so deep into the heart of the industry that it has referred it to the Competition Commission, which will carry out its own probe.
“Widespread” concerns found by the OFT included lenders emphasising the speed of loans over the expense, meaning that struggling borrowers plump for a quick fix without shopping around properly.
Some firms appeared to be basing their business around troubled borrowers who are forced to roll loans over, meaning the cost balloons. The borrower is then effectively trapped with their lender and would struggle to switch to someone else.
Debt charities have accused lenders of being “out of control” and have also reported seeing cases where people were drunk when they took out the loan or had mental health issues.
Some startling figures have certainly emerged from the debate. In one case seen by charity StepChange, a client faced a £1,830 debt for an initial loan of £120. More than 7,000 people who contacted debt charity StepChange last year had five or more payday loans – rocketing from just over 700 in 2009.
Meanwhile, out of the 50 biggest market players that the OFT homed in on, 38 failed to comply with at least one of the ombudsman’s complaint-handling rules. Thirty lenders’ websites emphasised quick access to cash over cost. Up to half of lenders’ revenues were found to come from the extra charges and interest from loans being rolled over.
The Competition Commission has powers to ban or limit products and shake up whole markets. Its own investigation will take up to 18 months to complete, but it is worth the wait – the Commission does have form for getting to the root of scandals to prevent any repeat.
For instance, it stepped into the payment protection insurance (PPI) mis-selling furore and recommended severe restrictions on the sale of PPI policies.
A further clampdown is also set to come from tough new regulator the Financial Conduct Authority (FCA), which takes over regulation of payday lenders from April and has powers to stamp out problems quickly. The FCA could place a possible cap on interest rates and limit or ban the number of rollovers lenders can offer, if it sees fit.
Following a recent summit into the industry, the FCA hinted that an advertising ban could be on the cards.
Martin Wheatley, the chief executive of the FCA, says: “If payday loan companies are genuinely targeting a particular income bracket – people with jobs – why do they advertise on daytime television?”
Meanwhile, the OFT has promised to continue its crackdown. If it believes that firms are posing an immediate danger to consumers it has powers to stop them in their tracks by removing their licences (which they need in order to trade). Consumer campaigners have welcomed the toughened stance from Government and regulators – but are also questioning why it has taken so long for something to happen.
Martin Lewis, founder of website MoneySavingExpert.com, who says the moves have been “shamefully late”, is calling for a cap to be placed on the total cost of loans.
For their part, payday lenders say they have been working hard to raise industry standards, including a new code to make sure loans are affordable. The Consumer Finance Association (CFA), which represents short-term lenders, argues that no other sector has come under such intense scrutiny in such a short space of time.
Payday lenders also say the clients they typically see are different from those often portrayed. According to the CFA three-quarters of borrowers earn more than £15,000.
The CFA agrees that rogue operators should “shape up or ship out”.
Whatever happens now, it seems clear that in these tough times, people have a pressing need for short-term loans – whoever they turn to.
The payday sector has rapidly doubled in size. The OFT estimated the sector to be worth around £900m in 2008. This is now thought to have topped £2bn and lenders such as Wonga have become household names.
Credit unions, which are financial co-operatives, have been invited to plug the demand for access to small sums of cash. The Government is investing £38m in credit unions in the coming years to help them expand their services to provide a “good value alternative” to payday lenders.
Meanwhile, the demand for accessible short-term loans continues.