110/12    20 November 2012

The OFT has opened formal investigations into several payday lenders over aggressive debt collection practices. It is also today writing to all 240 payday lenders highlighting its emerging concerns over poor practices in the sector.

These actions are set out in a progress report published today as part of the OFT's compliance review of the payday lending sector. It highlights concerns about:

• the adequacy of checks made by some lenders on whether loans will be affordable for borrowers
• the proportion of loans that are not repaid on time 
• the frequency with which some lenders roll over or refinance loans 
• the lack of forbearance shown by some lenders when borrowers get into financial difficulty 
• debt collection practices.

The OFT is continuing to gather and analyse information about the activities of payday lenders as its compliance review progresses. It also expects to warn the majority of the 50 firms inspected, which account for the majority of loans, that they risk enforcement action if they do not improve specific practices and procedures which came to light when they were inspected. The OFT will require those lenders it warns to provide it with independent audits to verify that they have improved their practices and procedures to comply with legal obligations and expected standards.

The emerging findings are based on information from a wide range of sources, including:

• a 'sweep' of the websites of 50 payday lenders
• a programme of inspections of over 50 individual lenders
• 686 consumer complaints
• a mystery shopper exercise involving 156 online and high street lenders
• 1,036 responses to a survey of businesses, trade associations and consumer bodies.

The OFT will publish a full report in the New Year setting out further findings on compliance, including whether wider action is needed to tackle problems in the sector.

The OFT has also today published revised Debt Collection Guidance, focusing on continuous payment authority (CPA), a mechanism commonly used by payday lenders to collect repayments.

The guidance helps to ensure that traders with a consumer credit licence do not misuse CPA. It makes clear that the OFT expects lenders' use of CPA to be reasonable and proportionate, and to have regard to a borrower's financial position.

The guidance sets out the minimum standards expected of traders and includes clear examples of unfair/improper use of CPA including:

• using CPA without the informed consent of the borrower or in ways that have not been agreed
• failing to explain adequately how CPA works and how it can be cancelled
• not taking steps to establish the reasons for the payment failure and whether the borrower may be in financial difficulties
• trying to take payment where there is reason to believe that there are insufficient funds in the account
• continuing to use CPA for an unreasonable period after a scheduled payment was due.

Breaching OFT guidance can lead to enforcement action.

David Fisher, OFT Director of Consumer Credit, 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 is also clear that, across the sector, lenders need to improve their business practices or risk enforcement action.

'Our report shows that a large number of payday loans are not repaid on time. I would urge anyone thinking about taking out a payday loan to make sure they fully understand the costs involved so they can be sure they can afford to repay it.

'Our revised guidance makes it absolutely clear to lenders what we expect from them when using continuous payment authority to recover debts and that we will not accept its misuse.'

NOTES

1. See the payday lending progress report. 
2. The Consumer Credit Act 1974 requires most businesses offering credit, lending money or involved in activities relating to credit or hire, such as debt collectors, to be licensed by the OFT. The OFT produces guidance to clarify its expectations of those companies and individuals that hold a consumer credit licence. Failure to have regard to OFT guidance can call into consideration the business' fitness to hold a consumer credit licence.
3. The OFT is not able to name the companies it is investigating because of disclosure restrictions under Part 9 of the Enterprise Act 2002. Where the OFT uses its formal powers under the Consumer Credit Act 1974 to refuse or revoke a credit licence, decisions are made public on the Consumer Credit Public Register. 
4. The OFT launched its review into the payday lending sector in February 2012.
5. The OFT has issued specific guidance for all businesses engaged in the recovery of consumer credit related debts. The Debt Collection Guidance sets out the standards expected of all business engaging in the activity including creditors, law firms and tracing agents as well as traditional debt collectors. See the OFT's revised Debt Collection Guidance.