OFT clamps down on payday lenders

The Office of Fair Trading (OFT) is clamping down on payday lenders after its review into the sector revealed that there is widespread non-compliance. The review has found that many payday lenders are ignoring the Consumer Credit Act and other legislation, and are failing to meet the standards set out in the OFT’s Irresponsible Lending Guidance. The OFT is also concerned about the way payday lenders are advertising and marketing their products, which affects agencies and telemarketers working on behalf of payday loan companies.

The OFT set out its main concerns in its Final Report and they include:

1. Irresponsible lending
Too many borrowers are given loans they cannot afford and when they can’t repay, payday lenders are encouraging borrowers to extend the loans, exacerbating their financial difficulties. This is causing real misery and hardship for a significant number of their borrowers.

2. Advertising and marketing
Most payday loan websites make potentially misleading claims by including restricted expressions such as “no credit checks” and “loans guaranteed.” This also suggests that lenders may not be carrying out sufficient affordability checks on borrowers. The OFT saw a pattern of advertising that emphasised speed and easy access to cash, at the expense of balanced information about the cost of lending, the risks if the borrower cannot repay the loan and the consequences of non-payment.

Of the 50 websites the OFT looked at, 30 emphasised the easy availability of credit and the speed of arrangement. Lenders must only use speed of process as an advertising point where such claims are true and not misleading. If the loan application is concluded quickly, borrowers are less likely to read and reflect on the information provided or shop around with other lenders.

Nearly half (20) omitted or downplayed important information about the costs and risks to the borrower – for example in relation to the use of continuous payment authority (CPA). 14 websites failed to show either a representative example or the Annual Percentage Rate (APR), where legally required, both of which give consumers important information about the total cost of their loan.

In a further 12 cases the representative examples were included but were not prominent enough, and in 12 cases the APR was not prominent enough. In both cases there are legal requirements on prominence which must be adhered to.

3. Rollovers
One in three payday loans is rolled over or re-financed, which means that rollovers account for 50% of revenues for the sector. The promotion of rollovers, therefore, raises particular concerns –lenders are not competing for these revenues, as customers in this position are largely captive.

The evidence suggests that lenders are slow to make customers aware of the alternatives available. In fact, 17 lenders actively promoted rollovers in marketing material or at the point of taking out the loan as a feature of the loan. 15 lenders proactively alerted borrowers to the rollover option prior to the loan repayment date. The OFT even saw some evidence of lenders deliberately encouraging borrowers to roll the loan over rather than repay.

The OFT’s view is that it is not acceptable for a lender to enter into a loan agreement with the expectation that a borrower will need to rollover. The OFT has evidence which suggests that encouraging rollovers is a deliberate commercial strategy for some firms. Staff in two large high-street firms told the OFT that rollovers were regarded as key “profit drivers” and that staff were encouraged to promote them.

4. Debt collection
The OFT believes that many of the problems which lenders have with debt collection could be avoided if they properly assessed the borrower’s ability to repay the loan at the time it was taken out. In any event, the OFT expects lenders to treat borrowers fairly, and with understanding and due consideration, when they are in financial difficulty.

The OFT monitored complaints about debt collection over a six-month period and the majority related to aggressive or unsatisfactory debt collection practices. Although the complaints related to a small minority of firms, these firms had a significant share of the payday lending market. The OFT is aware of cases where borrowers have been bombarded by debt collection phone calls on their mobiles and work phones, sometimes up to 16 times a day. This type of practice falls very far below the standards the OFT would expect.

OFT enforcement action
The OFT has taken the following action on payday lending and lenders who fail to cooperate risk losing their consumer credit licence:

• Launched formal investigations against a number of payday lenders and has more enforcement action in the pipeline
• Required 50 payday lenders (accounting for 90% of the market) to take immediate steps to address areas of non-compliance and prove to the OFT that they have done so within 12 weeks from the date of the Final Report. (Those lenders that fail to cooperate risk losing their consumer credit licence.)
• Set out in the Final Report clear statements about how the OFT consumer credit guidance applies to payday lenders.
• Sent letters/emails to all payday lenders making it clear that the OFT expects them to act now to ensure they are meeting these standards.
• Decided to provisionally refer the sector to the Competition Commission for a full investigation, pending the outcome of a consultation exercise.
• Will continue to monitor the market and to work with partners such as the debt advice sector to gather evidence which supports its investigations.

Advice for DMA members
The DMA legal team is happy to review any advertising/marketing material or telephone scripts to check that they comply with consumer credit legislation and members are encouraged to use this service (free for DMA members). The DMA will continue to monitor developments and will update members through this newsletter.

James Milligan, Solicitor, DMA