Topic: Financial Services
Who: The Office of Fair Trading (OFT), the Financial Conduct Authority
When: March 2013
Law stated as at: 2 April 2013
The OFT announced in its final report following a compliance review of the payday loan sector that it is giving 50 payday lenders (accounting for 90% of the payday loan market) 12 weeks to change their business practices.
The consumer and credit watchdog has issued a consultation on proposals to make a market investigation reference to the Competition Commission. Any comments on the OFT consultation paper are required by 1 May 2013 and the OFT expects to make a decision by June 2013 on whether to refer the payday loan market to the Competition Commission.
Unless payday lenders take fast action to deal with the OFT’s concerns, which cover all aspects of the sector from advertising to debt collection, they risk losing their licences.
The OFT discovered widespread non-compliance with the Consumer Credit Act and other legislation and concluded that too many people are being granted loans they cannot afford to repay, with lenders’ revenues in this sector being heavily dependent on customers who fail to repay on time and then rollover their loans.
30 of the 50 websites the OFT looked at were found to emphasise speed and simplicity over cost and in some cases the OFT found claims were made on the websites which if true would amount to irresponsible lending. The OFT also discovered that payday lenders tend to market their products as one-off short term loans (costing on average £25 per £100 borrowed for 30 days) when the reality is that many loans last longer and are more expensive because they are rolled over or refinanced.
Why this matters:
Consumer credit regulation will transfer from the OFT to the Financial Conduct Authority (FCA) on 1 April 2014. The FCA is currently consulting on the framework for a new regulatory regime for consumer credit and in its consultation paper refers to the number of serious problems identified by the OFT and states that it will take a robust approach to tackling problems in the payday loan sector. The OFT report and the outcomes of any Competition Commission investigation are likely therefore to play a major part in the reshaping of regulation in this sector.
On the advertising side, the FCA is looking at applying the same framework for regulating consumer credit advertisements as it applies to other regulated activities – the “financial promotions regime”. This is significant as breach of this regime is currently a criminal offence and a move to it is likely to increase costs substantially for lenders as the regime imposes an increased level of scrutiny on individual advertisements.
The FCA will consult on the proposed advertisements rules in autumn 2013 and the Advertising Standards Authority has also said it will work closely with the government and regulators to look at potentially improving the payday loan sector.