The Office of Fair Trading has warned 50 leading payday lenders that they need to clean up their business practices or face being closed down.
The deceitful practices of many payday lenders has led to the Office of Fair Trading (OFT) warning that they must clean up their act or face losing their credit licences.
Payday lending is back in the headlines this week, as a result of two Government reports looking at ways in which to strengthen its regulation over them.
The reports, one by the OFT and the other by the Department for Business, Industry and Skills, both identify shocking practices by payday lenders and have recommended stricter punishments if business practices are not improved.
The OFT report said that the leading 50 payday lenders, accounting for 90% of the payday market, has just 12 weeks to change its business practices or they risk losing their consumer credit licenses.
The areas that the OFT want payday lenders to modify are:
- better decision making on assessing whether the borrower can afford the loan;
- providing detailed explanations on how payments will be collected;
- cutting out aggressive debt collection practices; and
- issuing forbearance measures to help struggling borrowers.
Interestingly, these areas are already accounted for in the OFT's 2010 guidance on irresponsible lending. For example the guidance says: “All assessments of affordability should involve a consideration of the potential for the credit commitment to adversely impact on the borrower’s financial situation, taking account of information that the creditor is aware of at the time the credit is granted.”
No big changes
It would seem that what has changed is that the OFT has promised to more rigorously enforce their existing guidance, rather than provide substantial changes to the regulatory architecture.
[SPOTLIGHT]But the industry certainly needs change. The OFT has said that it will report the payday lending industry to the Competition Commission after finding evidence of irresponsibility between lenders. As the market competes on how quick lenders can give cash to borrowers, rather than on the cost at which they sell the credit, there is an incentive for a lender not to carry out sufficient credit checks.
This in turn means that payday lenders are not checking whether taking out a loan will be to the detriment of a borrower, which could negatively impact upon their ability to pay it back and see them enter a 'debt spiral'.
Instances such as one borrower taking out a loan to put a bet on a horse should surely signal irresponsible practices, and moves to curb these could not have come at a better time.
Health warnings
The Government has also made a commitment to work more closely with the Advertising Standards Agency to further regulate the advertising of payday loans.
While it is not certain what this will look like yet, moves could include adding financial health warnings to adverts, regulating what time adverts can be shown on TV, how spaced apart adverts are, and a further highlighting of the price a consumer would have to pay.
In order for lenders to not lose their licences more efforts are needed to ensure borrowers know exactly what kind of loan they are taking out. Controversy surrounds this type of credit because it is so expensive and often puts consumers further in to debt.
Making better assessments, while being up front and transparent about the way in which money will be collected from a debtor, will begin to improve the industry and make taking out credit fairer.