New probe into payday loan market
Payday lenders are to be the subject of a full-scale Competition Commission investigation amid evidence of "deep-rooted" problems in the sector.
The Office for Fair Trading (OFT) made the referral on fears that consumers who cannot afford to pay their loans back on time are finding themselves trapped with one firm when their loans are rolled over.
It is also worried that firms are emphasising the speed of the loan over cost and that the pressure to hand loans out quickly may encourage lenders to "skimp" on affordability checks. The Commission has powers to ban or limit products and shake up whole markets.
The Office of Fair Trading (OFT) has conducted a detailed investigation into the £2 billion sector, including spot checks on household names such as Wonga, and has now announced its decision to refer the market to the Commission.
A "significant" number of payday borrowers have poor credit histories and a pressing need for cash, meaning that they could be less inclined to shop around to get the best deal, the watchdog said. Some firms' business models appeared to be based around customers taking out loans which they are forced to roll over because they cannot afford them, the OFT found. This then leaves the customer trapped with that firm because they would struggle to switch to anyone else. Up to half of lenders' revenues were found to come from the extra charges and interest coming from loans being rolled over.
Consumer groups and charities welcomed the OFT's announcement, but some questioned why a bigger clampdown had not come sooner. Many have reported rocketing numbers of people struggling with payday loan debts in recent years, with more than 7,000 people who contacted debt charity StepChange last year struggling with five or more payday loans.
Wonga said that as a "pioneer of better regulation" it welcomes the chance to work with the Commission and the FCA. In a statement placed on the Open Wonga website, it suggested that the Commission should also take the opportunity to review consumers' use of other forms of short-term borrowing, including overdrafts and credit cards.
The OFT has written to 50 payday lenders in waves, giving them 12 weeks to prove they are up to scratch or risk being put out of business. So far, 20 responses have been received and the rest are expected by the end of July. Of the lenders contacted, five have told the watchdog that they have left the payday market, including two which have surrendered their licences.
Martin Lewis, creator of consumer help website MoneySavingExpert.com, said action was "shamefully late" in coming. Citizens Advice chief executive Gillian Guy said the industry is in "desperate need of a transformation from predatory firms to a responsible short-term credit market".
Payday lenders' trade body the Consumer Finance Association (CFA) expressed disappointment at the OFT's decision. Russell Hamblin-Boone, chief executive of the CFA, said: "No other sector has faced such intense scrutiny in such a short space of time. We would have preferred the inquiry to have been deferred to allow the significant improvements that lenders have made to take effect before the industry faced further judgment."