Is self-regulation failing the payday loan market?
Just days ago the Citizen's Advice called on the OFT to shut four payday lenders deemed detrimental to consumers.
The timing couldn't be clearer. From today the OFT will be granted new powers that will enable it to immediately revoke the Consumer Credit Licence of any company under investigation.
Previously any company being investigated for poor practice could continue to operate while any appeals were ongoing; a process that could take years to complete.
The CAB's complaints
While the CAB has refused to name any of the lenders under scrutiny, they have revealed two are well known household names.
The CAB's complaints come from its own investigations including the experiences of the people they've helped to resolve financial difficulties; a tenfold increase in those struggling with debt who've taken out a payday loan has already been reported by the CAB.
The problems they've revealed include:
- firms levying inflated fees and charges;
- continuing to take money when debts have been paid off;
- obstructing customers from making repayments online or over the phone then charging late fees;
- harassment by repeated telephone calls, text messages and emails to repay debts;
- chasing people for debts on loans when the individual didn't apply for a loan in the first place;
- aggressive and abusive staff
"The OFT must take immediate action to investigate and suspend these companies. These firms pose a real risk to people looking to get a short term loan to help tide them over.
"Our evidence shows these lenders are behaving as a law unto themselves. Excessive fees and charges are escalating debts and people are worried sick as companies bombard them with texts, emails and phone calls often overstating their debt collection powers." said Gillian Guy, Chief Executive of Citizen's Advice.
Because the payday loan industry introduced self-regulating codes of practice in 2011 and 2012, consumers do at least have greater grounds for complaint.
And the CAB's making full use of that. They're already rolling out a year-long study into the experiences of payday loan customers, as well as providing full information on what consumers can expect to be able to complain about in regards to payday borrowing.
In 2011 the Consumer Finance Association introduced a code of practice to improve responsible lending in the sector.
It was however debated at the time whether self-regulation would in fact offer much protection to the most vulnerable consumers.
A year later, the CFA got together with the Consumer Credit Trade Association, the BCCA and the Finance & Leasing Association to implement the "Good Practice Customer Charter".
The code added further consumer protection including providing better information and notification on the use of continuous payment authorities.
While the codes of practice were initially well received, they've clearly done little to protect consumers from poor treatment.
The complaints made by the CAB aren't exactly new. Since the codes were introduced there have been several reports of increasing complaints against lenders, including the investigation of several lenders by the OFT in November 2012.
The investigation was prompted over concerns of the adequacy of checks of affordability; the frequency of rollover loans; the treatment of consumers who get into financial difficulty and debt collection practices.
"We have uncovered evidence that some payday lenders are acting in ways that are so serious that we have already opened formal investigations against them. It is also clear that, across the sector, lenders need to improve their business practices or risk enforcement action." said David Fisher, Director of Consumer Credit at the OFT.
At the end of 2011, complaints data by the Financial Ombudsman revealed that 73% of complaints against payday lenders were upheld in the consumer's favour, the highest out of all 62 categories of financial services reported on.
"While the level of complaints is still relatively low, the fact that payday loan companies had the highest percentage of findings against them of all reported financial sectors indicates that we are vindicated in being so concerned." commented David Rodger of Debt Advice Foundation.
But it's not just complaints after these loans have been taken out that's causing concern.
Both Instant Cash (The Money Shop) and Wonga have received complaints to the ASA for their advertising.
Both complaints were made due to not displaying the annual percentage rate - or APR: the legal requirement to represent the cost of credit.
The ASA upheld the complaint against Instant Cash, however they allowed Wonga to continue running it's TV advertisement despite not presenting any information on the cost of borrowing to the viewer.
Could it be Wonga?
The CAB has at least revealed two of the payday lenders under fire are well known.
It's hard not to think of Wonga when you try and think of a 'well known' payday lender. And clearly, we're not the only ones.
In the This Is Money write up of the CAB's complaints, when they asked Wonga if they were involved a spokesperson replied "This is only something the CAB or OFT could answer as the correspondence is between them."
They've not exactly passed unscathed of consumer complaints though.
At the end of December 2012, the FOS revealed a tenfold increase in the number of complaints against Wonga over the past year and a half.
They also ended up in the unenviable position of being interviewed by Anne Robinson on Watchdog in September 2012.
The firm came under fire for opening up consumers to loan fraud; due to the way they automatically lend money online.
"Chasing people for debts on loans when the individual didn't apply for a loan in the first place" is one of the problems raised in the recent complaints by the CAB.
You can see the section of the episode below:
Not going away
After the OFT sent out letters to over 240 payday lenders in November 2012 warning them of poor practice, an MP was quoted to say "Payday lenders and high-street fast-finance firms are expected to campaign hard for more customers over the next 12 months before a crackdown on unscrupulous lending".
The Independent later reported how 1.5million people had taken out short-term loans over Christmas.
It's clearly not the result the OFT had planned.
Whether the OFT's new powers will be used fiercely enough to prevent even more people falling foul of such extortionate lending remains to be seen.
The payday loans market is still far from transparent despite the adoption of the new codes of practice.