Payday loan firms warned over lending and debt collection

media captionDavid Fisher, Office of Fair Trading: "The industry as a whole certainly needs to raise its game"

The payday loan industry has been warned to improve the way it lends money and collects debts, or face fines or closures.

The Office of Fair Trading (OFT), in an interim report, says most of the 50 big firms it has been inspecting do not operate fully by its rules.

The OFT says it is worried by reckless lending and aggressive debt collection.

It has now begun formal investigations into several payday lenders over aggressive debt collection practices.

The OFT will publish its full report in the new year, when it has ended an investigation which it started in February 2012.

But David Fisher, the OFT's director of consumer credit, said all 240 payday lenders have been put on notice to improve.

"What we are discovering is that right across the sector problems exist and the industry as a whole certainly needs to raise its game," he told BBC News.

He added that recent estimates suggested that the industry was now lending £1.8bn a year, double the amount of a couple of years ago.

Updated rules

The OFT is worried about the "poor practices" which its enquiries have been uncovering, and which chime closely with many of the criticisms that consumer groups have been making of payday lenders.

Among the OFT's concerns are that:

  • lenders do not check properly if their borrowers can afford to repay the money they have borrowed
  • too many loans are not repaid on time
  • the loans are then extended too often
  • lenders are too aggressive when borrowers fail to repay promptly

The regulator has become especially worried about the way payday loan firms use a type of repayment agreement called a continuous payment authority (CPA), using a credit or debit card to ensure they are repaid automatically.

The OFT has updated its rules for the industry to make it clear that if borrowers sign up for a CPA, it must be with their explicit agreement.

Borrowers must be told how a CPA works and how they can bring one to an end.

Lenders must not keep on trying to drain cash from their borrowers' accounts if there is not enough money available to meet the debt.

media captionMeggan Tile owes seven thousand pounds in payday loan debt and describes how the stress used to keep her awake at night

"Our report shows that a large number of payday loans are not repaid on time," said Mr Fisher.

"Our revised guidance makes it absolutely clear to lenders what we expect from them when using continuous payment authority to recover debts and that we will not accept its misuse."

The UK's most high profile payday lender, Wonga, said it welcomed the OFT report and its recommendations, which add to a new industry code of practice that was announced in the summer and which comes into effect next week.

"Regarding continuous payment authority, which is also used by a broad range of businesses outside of consumer credit, we believe it is an important method of collection and we share the OFT's concerns that it must not be misused," said a Wonga spokeswoman.

'Bad situation worse'

Joanna Elson, chief executive of the Money Advice Trust, welcomed the OFT's interim report.

She said the experience of clients coming to the Trust for advice was that "payday loans have a habit of making a bad situation worse".

"We have a lengthy list of concerns about the practices of many companies in the sector and we hope the OFT review will kickstart a more serious consideration of the problems payday loans create," she said.

"Many thousands of people have come to us for help after having seen their debt problem made far more serious by taking out one or more payday loans," she added.

The Financial Ombudsman Service (FOS) has found a small but increasing number of people complaining to it about payday loan firms.

A spokesman said the main reason for people complaining was that the loan had been unaffordable and should never have been granted in the first place.

"In the first half of this financial year - April to September 2012 - we received 271 new complaints; this compares to the 296 complaints brought to our service during the whole of last year (2011-12) - and we are currently upholding eight out of 10 cases in favour of the consumer," said an FOS spokesman.

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