Payday lenders warned about `aggressive' debt collection tactics

John Fitzsimons
by Lovemoney Staff John Fitzsimons on 20 November 2012  |  Comments 6 comments

The OFT is baring its teeth at payday lenders who it believes have been guilty of overly aggressive debt collection practices. But will it make any difference?

Payday lenders warned about `aggressive' debt collection tactics

The Office of Fair Trading (OFT) has launched ‘formal investigations’ into several payday lenders due to concerns about their aggressive debt collection practices.

It has also written to all 240 payday lenders to highlight its concerns about the poor practices lenders have adopted.

The OFT has expressed concerns about the following:

  • The adequacy of the affordability checks used by payday lenders
  • The proportion of loans that are not repaid on time
  • How frequently some lenders roll over or refinance loans
  • The lack of forbearance shown when some borrowers get into difficulty
  • Debt collection practices

Debt collection antics

The OFT has opted to issue revised Debt Collection Guidance, focusing on continuous payment authority (CPA), which is a mechanism many payday lenders use when it comes to collecting repayments.

We’ve written before about how banks take advantage of CPAs, where your payment comes through your debt or credit card rather than through your bank account and sort code. You can read more in Continuous payment authority: we are being failed by the Financial Ombudsman.

Evidently lenders have been misusing CPA, which is why the OFT has had to clear up what constitutes minimum standards and what would be classed as unfair or improper use of CPA. This includes:

  • Using CPA without the borrower giving their consent, or in ways that have not been agreed
  • Not explain properly how CPA works or how it can be cancelled
  • Failing to take steps to find out why a payment has been missed and whether the borrower is in financial difficulty
  • Attempting to take payment when there is good reason to be believe there are not sufficient funds in the account
  • Continuing CPA for an unreasonable period after a scheduled payment was due

Lifting the lid on payday loans

The OFT has been looking into the payday sector for a while now. As well as receiving 686 complaints from members of the public, it’s also inspected 50 individual lenders (who are responsible for the majority of payday loans), conducted a ‘sweep’ of 50 lending websites and undertaken a mystery shopper exercise involving 156 online and high street lenders.

The body has said that it expects to warn the majority of the 50 firms it’s looked at in detail that they face enforcement action if they do not improve specific practices and procedures.

David Fisher, the director of consumer credit at the OFT, said: “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’s also clear that, across the sector, lenders need to improve their business practices or risk enforcement action."

A full report will be published in the New Year highlighting further findings on lenders’ compliance with the rules and whether wider action is needed.

So what can the OFT actually do?

According to the OFT, the action it can take depends on the level of actual or potential harm to borrowers and just how frequent the dodgy practices were.

However, it can impose ‘requirements’ on a lender to change some of its procedures. Fail to comply and the lender could suffer a £50,000 penalty. It may also choose to vary its credit licence.

In serious cases, the OFT can actually revoke a credit licence altogether. So there is at least the possibility of some payday lenders disappearing entirely as a result of this investigation.

Will it make any difference?

First, let’s remember that this is not a criticism of payday loans as a financial product, more of the way that lenders are employing questionable procedures which make a ropey product even worse.

Payday loans aren’t going anywhere. The Consumer Finance Association, which represents payday loans, has its own research which found that most payday loan borrowers were extremely satisfied, with more than half saying they had prevented a one-off difficulty escalating or had made it easier to pay bills on time.

I can wring my hands as much as I like and talk about the morality – or lack – of it all, but Wonga and the rest are not going to disappear.

What we can hope for is that the OFT and the regulators take a firm grip and ensure that these loans really are only used in emergencies, and that borrowers who do opt to use them are not taken advantage of.

There are loads of examples of lenders advertising payday loans to pay for everyday things.

Take It suggests a payday loan if “You need new clothes for yourself and your family and let us not forget the gifts for friends, family, neighbors [sic] and colleagues.”

Or, which boasts that previous customers have used their loans to pay for “A much needed holiday, a romantic dinner out, tickets to see their favourite band, buying that new smartphone, a new TV.”

These are just two sites employing somewhat questionable advertising of what their loans can be used for. Personally, the thing I found most depressing from the OFT’s report is that there are now 240 different payday lenders. 240!

What do you think? Does the payday loan sector need to be more vigilantly regulated? Is there room for a product like it in the market? Let us know your thoughts in the Comment box below.

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What is a Crisis Loan?

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Comments (6)

  • GaryDean
    Love rating 76
    GaryDean said

    Really, what's the difference between this ilk & lenders like MBNA who, in a timely manner when you have a few grand owing on your card, (while you're faithfully paying off a good chunk each month I might add) write to inform you that they are raising your interest rate by a further 6 to 8%? You may have been struggling to meet those payments & that letter can be the straw that breaks the camels back. They are ALL crooks & there is no doubt in my mind whatsoever that the big lenders would resort to such measures if they felt it had come to it.

    Report on 20 November 2012  |  Love thisLove  1 love
  • vulcanite
    Love rating 39
    vulcanite said

    I agree entirely with GaryDeans comments, particularly in regard to MBNA, who are both rude and aggressive in almost all their dealings with you, one reason I left them. I will never understand why licenses were ever granted to Payday lenders, all of whom I would liken to a backstreet Gorbals loanshark. Time to wrap them all up.

    Report on 20 November 2012  |  Love thisLove  0 loves
  • electricblue
    Love rating 769
    electricblue said

    As far as I know, at least with credit card companies, if you inform them that you will not add further debt to the card and return it, you can pay off the balance at the original interest rate. Their action should not therefore put you into unanticipated dire financial straits. Payday lenders are on an entirely different and unregulated planet and there should be a cap on longer term interest if borrowers cannot pay back on the original terms, as this would stop lenders deliberately seeking out vulnerable and gullible borrowers who they can harass.

    Report on 20 November 2012  |  Love thisLove  0 loves
  • Mike10613
    Love rating 626
    Mike10613 said

    240 companies operating as loan sharks is disgusting. It's nothing to do with the fact we have a Tory government of course. They will keep scamming the vulnerable and desperate in society. They have enough problems with parasites like Atos Healthcare and the officious staff at the Jobcentre. If the Jobcentre ran the crisis loans and budgeting loans properly, the likes of Wonga would go out of business.

    Report on 20 November 2012  |  Love thisLove  0 loves
  • PoohBah
    Love rating 23
    PoohBah said

    @Mike10613: Wonga started operating in October 2007. Remind me: which party was in government then? Your second sentence is probably correct, although I'm sure you intended to be ironic. I concur with your general implication that payday loan companies are absolute scum.

    Report on 20 November 2012  |  Love thisLove  0 loves
  • driver67
    Love rating 26
    driver67 said

    I'm horrified that there are so many of these Legalised Sharks in business. Who pays for their ads on the box I wonder? Well the poor suckers who borrow the money of course!

    There is a thing called a Credit Union, and having done some work for one (I am a telephone engineer I hasten to add) I had no idea that this type of loan existed, I would heartily recommend anyone with a money problem to visit one.

    Report on 20 November 2012  |  Love thisLove  0 loves

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