Policing of payday lenders is timid, say MPs
A regulator has been "ineffective and timid" in tackling rogue payday and door-to-door lenders, MPs have said.
Unscrupulous behaviour by the "shabby end" of the UK consumer credit market cost consumers at least £450m a year, the Public Accounts Committee said.
It criticised the Office of Fair Trading (OFT) for failing to act quickly to stop lenders targeting vulnerable people.
But the OFT said it had taken strong action while facing legal restrictions.
The UK's consumer credit market was one of the largest in Europe, the committee's report said, with £176bn lent to individuals in 2011-12.
Credit card lending and personal loans still dominated the market, but door-to-door and payday lending had risen significantly since the financial crisis.
These primarily offered customers short-term, high-interest loans. There are nearly two million payday loan customers, but there has been widespread concern that some lenders have been encouraging people to take on debts which then rapidly spiral out of control.
The committee was scathing in its view of regulation by the OFT, which has the power to grant or revoke the credit licences that allow these lenders to operate.
"[The OFT] has been ineffective and timid in the extreme. It passively waits for complaints from consumers before acting," said Margaret Hodge, who chairs the committee.
"It has never given a fine to any of the 72,000 firms in this market and very rarely revokes a company's licence."
It went on to suggest that the regulator lacked basic information about operators in this sector, and how much they lent. It failed to effectively prevent directors of lenders that lost their licence - a process that took up to two years - from setting the business up again under a different name.
Investment by the OFT in regulating the sector was also described as "paltry", with fees charged to lenders unrelated to their size.
"If the OFT had raised its fees, it could have raised its game as a regulator," it said.
Since evidence was taken by the committee, the OFT has challenged 50 leading payday lenders to clean up their act after it found "widespread irresponsible lending" in the industry.
As a result, two have surrendered their credit licences, three have had their licences revoked, and formal investigations have started into another three.
Defending its work, the regulator said that it had a good track record in tackling the areas of greatest risk to consumers, but had to work within tight legal rules.
"We are disappointed the committee has not acknowledged the legislative constraints under which the OFT currently operates, including a lack of regulatory powers and the limited circumstances where a fine can be imposed," a spokesman said.
Next year, some of the OFT's responsibilities will move, with regulatory responsibility shifting to the Financial Conduct Authority (FCA).
The committee said it needed to be quicker to intervene, and needed better intelligence about lenders, but it also said it expected better regulation to start before 2014.
"The regulatory regime must stop tiptoeing around the problem." Mrs Hodge said.
The committee said that threats to revoke licences should be followed through.
It also wanted clearer details for consumers on the amount of interest charged, by replacing the "outdated" APR measure with a clear statement of the total repayable amount in cash.
It also called for a limit on the number of times a short-term loan could be "rolled over" by door-to-door lenders month to month, pushing up the interest charged.
Charities have suggested that problems with short-term credit are becoming an increasingly important issue for people they speak to.
On Tuesday, Citizens Advice suggested that the payday lending industry was "out of control", with loans given to people aged under 18, to those with mental health issues and to individuals who were drunk at the time.
The Money Advice Trust said its National Debtline received 20,013 calls about payday loans last year, double the previous year, and a huge increase from the 465 calls in 2007.
Richard Lloyd, executive director of consumer group Which?, said: "This is a damning verdict on the credit market and the OFT's failure in the past to step in and protect consumers. It underlines once more why a crackdown is urgently needed to tackle unscrupulous high-cost lenders.
"We are encouraged by the OFT's recent, tougher, approach, but there must be no further delay in taking action, starting with a ban on excessive fees and charges, and stricter rules on affordability checks."
Consumer Minister Jo Swinson said: "We agree that stronger powers are needed for the regulator which is why the OFT now has the power to suspend a credit licence immediately and the new Financial Conduct Authority will have wide-ranging powers to ban products, order consumer redress and impose unlimited fines."
And the Economic Secretary to the Treasury, Sajid Javid, said the government was introducing "a fundamentally new approach" to regulate consumer credit.
He said it would ensure that irresponsible firms and bad practice would "have no place in the consumer credit marketplace".
Russell Hamblin-Boone, chief executive of the Consumer Finance Association, a payday lenders' trade body, said: "The Consumer Finance Association has always supported and welcomes well-designed, well-implemented regulation."
He said that the larger lenders already had a code of conduct in place.