U.K. regulators told 50 sub-prime lenders they have 12 weeks to change business practices described as causing “misery and hardship” for borrowers too poor to afford short-term loans.
Companies that offer so-called payday loans risk losing their licenses if they don’t meet regulators’ expectations, the Office of Fair Trading said today on its website. It may also refer the industry to the British antitrust regulator after finding lenders competed on speed and easy access, rather than price. The OFT didn’t name any individual companies.
The offending firms didn’t check whether customers could afford the loans before making them or rolling them over, didn’t explain how payments would be collected and used “aggressive” debt collection methods, the OFT said. Payday lenders such as London-based Wonga.com Ltd. charge high interest rates for small cash sums over shorter periods than a bank loan. The industry’s loans cost an average of 25 pounds ($37.70) per 100 pounds for 30 days, the OFT said.
“We have found fundamental problems with the way the payday market works and widespread breaches of the law and regulations, causing misery and hardship for many borrowers,” OFT Chief Executive Officer Clive Maxwell said in the statement.
Customers are often those whose credit rating bars them from using banks or mutual lenders and are “frequently in a vulnerable financial position,” the OFT said today. The market has more than doubled since 2009 to as much as 2.2 billion pounds, it said.
“We are digesting the full import of the report at the moment and will await more specific information,” Patrick Barrow, a spokesman for PaydayUK, a unit of Berwyn, Pennsylvania-based DFC Global Corp., said by phone.
Brian Corke, a spokesman for the British Cheque Cashers Association, declined to comment on the OFT report and said the trade group provides no public data on the names or size of its members. A Wonga.com spokeswoman declined to comment.
“This is the end of a yearlong review, and we will take time to review the issues that have been raised,” Russell Hamblin-Boone, CEO of the Consumer Finance Association, said in a statement. “We recognize there are concerns about the industry. However, these reports are a snapshot in time and work is already under way.”
Requests for comment from the Consumer Credit Trade Association and the Finance & Leasing Association weren’t returned. The three groups also represent payday lenders.
The industry has come under fire from bankruptcy professionals and consumer groups such as Which?, which says the firms grant loans to people who can’t afford them.
“Which? research has repeatedly found poor affordability checks and excessive charges that push consumers into a vicious cycle of debt,” Richard Lloyd, executive director for the consumer advocacy group, said in a statement. “A referral of the payday market to the Competition Commission to consider its future is a good move, but there must also be no delay in taking immediate action to protect people in difficulty today.”
Complaints to the Financial Ombudsman Service, which mediates between financial companies and clients, rose to 387 in the first three quarters of the 2012-2013 fiscal year from 33 in 2009-2010, the OFT said. Five percent of loans are refinanced four or more times, it said. Loans refinanced that often provide the firms with 19 percent of their revenue, it said.
“If we do not see rapid, significant improvements by the 50 lenders we inspected, they risk their licenses being removed,” Maxwell said. “Payday lending is a top enforcement priority for the OFT.”