Payday Loans: Firms Given Reform Deadline

The UK's biggest payday loans firms are facing the prospect of being put out of business unless they implement swift changes to their practices within 12 weeks.

The ultimatum was issued by the Office of Fair Trading (OFT) following a wide-ranging investigation of the controversial sector as it emerged that a separate shake-up would place greater controls on advertising by such firms.

The Government will work with the Advertising Standards Authority (ASA) and the industry to make sure advertising does not tempt consumers into taking out payday loans that they cannot afford, and restrict the number of adverts firms put out per hour and the times they can advertise.

Lenders will also be required to make sure that interest rates are clearly displayed.

The OFT carried out checks on 50 major lenders and obtained information from all 240 lenders in the market.

The inquiry uncovered evidence of "widespread irresponsible lending", the OFT said.

It confirmed it was also proposing to refer the payday market to the Competition Commission after finding "deep-rooted problems" in how lenders compete with each other.

The OFT said it had found evidence that the 50 lenders, which account for 90% of the market, were failing to comply with the standards expected and were therefore in danger of losing their licences.

Some of the worst problems identified included lenders not carrying out proper affordability checks before lending or rolling loans over, failing to explain adequately how payments will be collected, acting aggressively to claw back debts and not making enough allowances for struggling borrowers.

OFT chief executive Clive Maxwell said: "We have found fundamental problems with the way the payday market works and widespread breaches of the law and regulations, causing misery and hardship for many borrowers.

"Payday lenders are earning up to half their revenue not from one-off loans, but from rolled over or re-financed deals where unexpected costs can rapidly mount up."

The regulator acted after charities reported rocketing numbers of complaints about payday lenders from borrowers.

The Money Advice Trust (MAT) recently said complaints about payday loans have doubled year-on-year to a record 20,000 in 2012.

New regulator the Financial Conduct Authority (FCA), which will oversee the consumer credit market from next year, will prioritise tighter rules on payday lending that could come into effect from April 2014.

The FCA's rules will be binding and if they are broken it will have tough enforcement powers including imposing unlimited fines and the ability to claw consumers' money back.

The Government is also planning to do more to encourage greater communication within the industry to stop consumers taking out multiple loans from different lenders.

Sajid Javid, Economic Secretary to the Treasury, said: "The Government is introducing a fundamentally new approach to regulating consumer credit, which will ensure that irresponsible firms and bad practice will have no place in the consumer credit marketplace.

"Consumers can have greater confidence that the new FCA will intervene early and decisively in their interests - thanks to its more focused remit, objectives and powers."