Monday, 13 May 2013

Payday lender watchdog

Payday lenders who've bothered to join a trade body called the Consumer Finance Association have brought in the former head of the Banking Code Standards Board, Seymour Fortescue, as a sort of voluntary internal watchdog.

He says he'll show "zero tolerance to bad practice" and concentrate on "proper credit appraisal, preventing repetitive borrowing, transparency of charges and fair treatment of customers in financial difficulties".

In other words, it looks like a response to the scathing Office of Fair Trading report in March which found:

*28 per cent of loans are rolled over or refinanced at least once, providing 50 per cent of lenders’ revenue

*19 per cent of revenue comes from the five per cent of loans which are rolled over or refinanced four or more times.

*Debt advisers reported that borrowers seeking help with payday lending debts had on average rolled over at least four times and had six separate payday loans.

*A number of firms are using aggressive debt collection practices which fall far below the standards set out.

*Real misery and hardship for a significant number of payday users.

The findings led the OFT to the conclusion that:

"Firms which are well-established members of trade associations were responsible for many of the unfair practises we observed - including some of the most extreme examples. Trade associations must do more to encourage compliance. They need to act quickly..."

So now we have a watchdog. Obviously it's better to have him than not have him. 

And the OFT's action has had a further impact. 2 payday lenders have thrown in the towel and given up their licences and a further 3 face formal investigations.

But there are a couple of reservations about all this.

First, there are several trade bodies. Wonga, for instance, isn't a member of the CFA. It's joined something called the FLA, the Finance & Leasing Association, which has a different code.

Some payday lenders may not be members of any trade body. Their customers will clearly have a lower level of protection.

The second point is that the OFT decided that the whole business and its market were deeply flawed, because borrowers are sitting ducks in the face of its tactics and charges.

"Irresponsible lending is not a problem confined to a few rogue traders," said the OFT, "But has its roots in the way competition works in this market.  The evidence suggests that many consumers are in a weak bargaining position, and that firms compete on speed of approval rather than on price."

In other words, zap a loan quickly to someone who's desperate for cash and you are able to set the terms to your advantage, charging interest of thousands of per cent.

This is why the OFT said it was minded to refer payday lenders to the Competition Commission. 

It must be pretty doubtful whether the appointment of the watchdog will persuade officials to change their minds when they make a final decision on the reference in June.

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