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.