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21st November 2012

A detail program of checks into the UK payday lending sector has resulted in the OFT issuing an interim report. The report and associated actions appear to represent a “yellow card” for payday lenders in general. Analysis of the report from the Office of Fair Trading confirms that much of the industry is failing to comply with the rules that govern their businesses.

Amongst a series of failings, the issues of failing to check that borrowers can repay loans and the high number of loans that aren’t repaid when they fall due appears to be especially serious. The first signifies that the industry too often fails in its duty to lend responsibly. The second confirms that the outcome of this failure is the creation of debt management distress for many payday loan users.

When debt does become a problem too many payday lenders are accused of failing to observe the OFT’s Debt Collection Guidance. This set of rules has also now been updated to deal with an emerging issue of the abusive use of continuous payment authorities by some payday lenders.

In the future payday lenders that wish to use continuous payment authority systems will need to go through a number of new steps. Borrowers should be told how these arrangements work and how to cancel it if necessary. Payday loan providers will not be able to make endless attempts to recover funds using these continuous payment authority mechanisms long after a debt has fallen into arrears.

As well as general problems that run throughout much of the industry, the OFT has identified a number of firms where they have discovered very serious issues. Formal investigations into these firms will proceed with the prospect of formal action being taken against them in the future.

Will this yellow card for payday lenders be sufficient to make them play by the rules? The OFT, in their role as a referee, have put firms on notice that a failure to play fair with consumers could mean that they’re not allowed to play at all in the future. How willing is the Office of Fair Trading to follow through on this threat? They have certainly been effective at improving standards in the debt management industry over the past couple of years and have acted strongly against particular DMP firms where it was believed to be necessary. Payday lenders are now in the firing line.

News of these compliance problems is just the latest bad news story that has befallen payday lenders. It seems using a payday loan might discourage other mainstream lenders from offering you credit if you later apply. Mortgage lenders are thought to be excluding payday loan users from certain mortgage products. Whenever short of a story, the newspapers can seemingly catch them out with ease. Payday lenders even score a massive own-goal by producing a terrible piece of research that undermined their case further. Debt misery is being caused for far too many people for regulators and politicians to be able to stand to one side any longer.

Will things improve? We’ll be watching and writing.

 

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