OFT calls for review of payday lenders

The UK's Office of Fair Trading has called for a review into payday lenders after deep-rooted problems came to light in the way the £2-billion industry treated vulnerable customers.

The lenders, which extend loans which borrowers repay when they get their wages, have grown rapidly in the UK with banks cutting back on short-term credit after the 2008 financial crisis. However, they had come under attack from politicians and consumer groups for extortionate interest rates and for shabby treatment meted out to borrowers.

According to Clive Maxwell, chief executive of the OFT, the regulator had come across evidence of financial loss and personal distress to many.

The OFT added firms were profiting from loans that could not be paid back on time. It found that nearly half of lenders' revenues came from fees charged for customers extending loans and 20 per cent of revenues came from loans extended at least four times.

The watchdog went on to add that it was difficult for customers to identify and compare the cost of loans from payday lenders and that the relevant laws were not being complied with by all firms. Also many of the borrowers had poor credit histories as also limited access to other forms of credit.

According to the regulator, variable levels of compliance with credit laws and guidance meant firms that invested time and effort for compliance were at a competitive disadvantage.

The referral comes after a year-long review of the sector which found evidence of irresponsible lending and breaches of the law, which according to the OFT were causing "misery and hardship for many borrowers".

Although lenders said their high-cost loans were designed to be taken out over short periods and that annual interest rates of over 4,000 per cent were not a fair indication of the cost, the regulator found companies were making up to 50 per cent of their money from customers who extended or rolled over loans or incurred late payment charges.

Announcing the referral to the Competition Commission, the OFT highlighted several aspects of the market that might be hampering competition including practices which made it difficult for consumers to identify and compare costs and barriers to switching when loans were rolled over.

According to Maxwell, competition appeared not be working properly in the payday lending market, allowing firms to profit from making loans that could not be paid back on time.