Payday loan regulator ‘lacks power’ to tackle predators

A damning report by a powerful committee of MPs said the OFT had been “ineffective and timid in the extreme” in tackling the “shabby end” of the credit market, which is costing borrowers £450m a year.

The public accounts committee (PAC) criticised the OFT for not taking tougher action.

But the OFT hit back, claiming it was taking “strong, targeted action” in the areas of greatest risk to consumers but is held back by law.

An OFT spokesman said: “We are disappointed that the committee has not acknowledged the constraints of the legislation under which the OFT currently operates which… was not designed to provide a supervisory approach to addressing potential consumer harm.

“As the National Audit Office recognised, these constraints include a lack of regulatory powers and the ability to impose fines only in very limited circumstances.”

‘Passive’ regulator

In March the OFT began rolling out regulation requirements to 50 payday lenders, giving them a 12-week deadline to prove their good behaviour or risk losing their licences to trade, which the MPs said was an “encouraging” step.

A spokesman for the OFT told Channel 4 News that in the last two months it has revoked the licences of three payday lenders, three more are under investigation, and this week the OFT has begun to receive the first completed forms from the group of 50 it began targeting in March.

Two of the 50 have already surrendered their licences, the OFT said, and a third is leaving the market.

The OFT will also rule on whether or not to refer the UK’s payday market to the Competition Commission in June.

But PAC Committee chairwoman Margaret Hodge criticised the OFT’s handling of the sector. She said: “It [the OFT] passively waits for complaints from consumers before acting. 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 doesn’t understand the market – how much each firm lends and who its customers are – and can’t be certain if directors of companies that have run into trouble are now running other companies.”

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.

‘Final warning’

Mr Lloyd said: “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.”

He added that today’s report should be the “final warning” to all lenders to clean up their act.

Mrs Hodge was also encouraged by the OFT’s targeting of 50 lenders.

However she said: “We will be expecting the OFT to show that this marks the start of a genuine step up from the inadequate approach that was evident at our hearing – and to follow through on its threat to revoke licences if these lenders do not mend their ways.”

Licences revoked

Meanwhile, the OFT pointed out that a previous crackdown on the credit industry has seen the licences of the UK’s biggest credit broker Yes Loans and largest debt management firm, First Step Finance, revoked. The latter however is subject to appeal, and as such is still operating.

A spokesman for the OFT told Channel 4 News that it does not have the power to simply shut down a payday loan company within days. “It can take a year, as there are several rights of appeal which we are legally obliged to follow,” he said.

From 2014, the Financial Conduct Authority (FCA) will be given new supervisory powers to do more to intervene.

Mr Lloyd said: “When the Financial Conduct Authority takes over the regulation of credit next year, we’ll continue to push for them to be the strong and proactive regulator consumers need”

Under the new rules the FCA will have the power to put a cap on the cost of credit, for example.

Earlier this week, the debt charity Citizens Advice published a report which showed payday loan companies lent money at soaring interest rates to people with mental health issues, under-18s and customers who were drunk.