FIFTY payday lenders have been given 12 weeks to prove they are treating customers well or they could be shut down, the Office of Fair Trading (OFT) warned yesterday.
And the City watchdog issued a consultation proposing its successor body, the Financial Conduct Authority, take over regulating the sector and be given much greater powers over advertising, sales practices and licensing.
The industry has been under mounting political pressure as campaigners pushed for more controls to prevent the poor, vulnerable or desperate from being exploited by high-interest rate lenders. But their main demand for a cap on annualised interest rates has been rejected.
Interest rates can come in as many thousands of per cent over a year, though the industry notes loans are only intended to be taken out over a matter of weeks meaning customers should not ever pay such amounts.
Instead, the regulator wants to improve selling practices to make sure customers understand the loans they are taking, as well as cutting down on fines and extra interest charges which hit customers who miss repayment dates, locking them into long, costly relationships with the lenders.
Firms will also have to apply for new licenses, and will have to show they are running proper credit checks to ensure customers can repay the loans.
Although the vast majority of customers do repay their loans on time, the OFT found almost half of the industry’s revenues come from those who roll over loans, often several times. And it added 19 per cent of revenues come from the five per cent who roll over debts five or more times, noting that this suggests intense pressure on customers to roll over, in a non-competitive environment.
“In many cases what is happening when a loan is rolled over is not clear to customers,” the OFT found.
“This uncertainty creates the risk of further reducing the incentive for customers to shop around for competitive rates at the point of rollover.”