Pay day lenders face major probe

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Payday lenders have been referred for a full-blown investigation by the Competition Commission after the trading watchdog uncovered “deep-rooted” problems with the industry.

The Office of Fair Trading (OFT) said it decided to make the referral because it continues to suspect that features of the market “prevent, restrict or distort competition”.

The “fundamental” problems it has found, such as loans becoming far more expensive than struggling borrowers had expected, cannot be tackled by existing laws and guidance, it said. The OFT decision is the culmination of a large-scale investigation into the £2 billion payday sector, including spot checks on household names such as Wonga.

The OFT said it is concerned that lenders are mainly competing on the availability and speed of loan approval, rather than how much it will cost the borrower.

It said: “The competitive pressure to approve loans quickly may give firms an incentive to skimp on the affordability assessment which is designed to prevent irresponsible lending and protect consumers. The OFT is also concerned about business models that appear predicated on making loans which are unaffordable, leading to borrowers paying far more than expected through rollovers, additional interest and other charges”.

Clive Maxwell, OFT chief executive, said: “Competition appears not to be working properly in the payday lending market, allowing firms to profit from making loans that cannot be paid back on time. We have seen evidence of financial loss and personal distress to many people.”

The commission has strong powers to ban or limit products and shake up whole markets. Tough new regulator the Financial Conduct Authority (FCA) will oversee the market from next April. The FCA’s powers will include the ability to place a “possible cap” on interest rates and ban or limit the number of rollovers lenders are allowed to offer, the OFT said.

During its investigation, the OFT found that lenders get up to half of their revenue from loans which had been rolled over or refinanced. A “significant” number of borrowers have poor credit histories and a pressing need to get access to cash, meaning that the cost of the loan may be a less significant factor for borrowers and weaken competition on price, the watchdog said.

Charities and consumer groups, many of whom have seen rocketing numbers of people struggling with payday loan debt, welcomed the OFT’s decision, although some questioned why action has not come sooner. Martin Lewis, creator of consumer help website MoneySavingExpert.com, said: “Finally, politicians and regulators are picking up the ball. Yet it’s shamefully late. Millions of people have already spent billions of pounds on these often disgustingly expensive debts that lead many people into financial hell.”

Citizens Advice chief executive Gillian Guy said its evidence has found that in two-thirds (64%) of cases loans come without any checks to make sure the borrower can afford to repay. She said: “The industry is in desperate need of a transformation from predatory firms to a responsible short-term credit market.”

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