Summit to discuss payday loans
Payday lenders, regulators, charities and Government ministers will be brought together on Monday to tackle the "deep-rooted" problems found in the loan industry.
Consumer minister Jo Swinson will host the summit, which comes just days after the sector was referred for an in-depth investigation by the Competition Commission.
The meeting will look at whether more can be done to clamp down on problems in the industry. The commission's investigation will take up to 18 months and it has powers to ban or limit products and shake up whole markets.
The Office of Fair Trading (OFT) referred the £2 billion industry to the Commission last Thursday, saying it 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.
During its investigation, the OFT found language used by lenders to reel in customers included the phrases: "Instant cash" and "Loan guaranteed". The OFT described the problems as "deep-rooted" and 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. 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 by the OFT to come from the extra charges and interest coming from loans being rolled over. The payday sector has come under heavy criticism from debt charities, which have accused lenders of being "out of control" .
Ahead of the summit, Which? executive director, Richard Lloyd, said the consumer group wants to see more action from Government to tackle the "toxic market". He said: "We want new rules banning excessive charges, a restriction on the number of times a payday loan can roll over and clearer advertising to help people struggling with spiralling debt."
Payday lenders have argued they have worked to clean up their act, including the introduction of a new code of practice last year to make sure loans are affordable and give more help to borrowers who are struggling.
New regulator the Financial Conduct Authority, which has powers to step in quickly and stamp out problems, will oversee payday lenders from next April. Its powers would enable it to place a possible cap on interest rates and limit or ban the number of rollovers lenders can offer, if it sees fit.
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.