Committee of MPs says watchdog failed to invest enough in regulation, never fined a firm and was slow to revoke licences
The watchdog responsible for regulating the UK’s payday lenders has been “ineffective” and “timid”, and has failed to identify risks of malpractice which have cost consumers at least £450m a year, according to the Public Accounts Committee (PAC).
The Office of Fair Trading, which currently regulates 72,000 firms offering consumer credit of various kinds, was accused in a PAC report of lacking basic information on the £176bn a year sector.
It had failed to invest enough in regulation, had never fined a firm for bad practice, was too slow to revoke credit licences, and on the occasions it did take licences away it failed to stop unscrupulous lenders “phoenixing” under different names, the committee of MPs said.
The bulk of the consumer credit market is made up of mainstream lenders offering credit cards and personal loans, but in recent years there has been a boom in alternatives, including doorstep lending and high-cost short-term payday loans.
As these types of borrowing have grown, so has the controversy around them, and stories about poor lending practices are rife. Some consumers have seen small debts spiral out of control as a result of late payment fees, roll-over loans and interest rates often in excess of 4,000% a year.
This week the charity Citizens Advice said it knew of cases where loans had been given to under-18s, to people with mental health issues, and to people who were drunk at the time of securing the loan. One client who took out a £50 loan was targeted with emails and texts offering more cash and ended up with debts of £800.
“Some of these lenders use predatory techniques to target vulnerable people on low incomes, encouraging them to take out loans which when rolled over with extra interest rapidly become out of control debts,” the committee’s chair, Margaret Hodge, said. “Meanwhile, the OFT has been ineffective and timid in the extreme. It passively waits for complaints from consumers before acting.”
PAC’s report said the OFT lacked information on how much lending was being done by each firm, and about how different people used consumer credit. A study commissioned from the National Audit Office suggested the scale of consumer harm was at least £450m a year, but the OFT was accused of lacking detailed information on the types of harm suffered by different groups of borrowers.
One issue was a lack of funding, the MPs said. The OFT had allowed large companies to pay the same annual £1,075 licence fee as small firms, and in 2011/12 it had just £1 to spend on regulation for every £15,300 lent to consumers. “If the OFT had raised its fees it could have raised its game as a regulator,” the report said.
The report also called for the cost of borrowing to be expressed as a total amount repayable rather than an annual percentage rate, saying this was outdated and misleading to borrowers taking loans for less than 12 months.
In March, the OFT published a damning report into the sector and wrote to 50 payday lenders giving them 12 weeks to clean up their act. Since then three have surrendered their licences, the latest on Thursday, while the others have indicated that they plan to make changes to make sure they meet consumer credit regulations. It has also suspended the licences of MCO Capital and two cheque-cashing firms offering payday loans.
The committee welcomed that action, but Hodge said: “We will be expecting the OFT to show that this marks the start of a genuine step up from the inadequate approach that was evident at our hearing – and to follow through on its threat to revoke licences if these lenders do not mend their ways.”
In April 2014, responsibility for regulating the sector will transfer to the new Financial Conduct Authority, which has indicated that it plans to take a hard line against rogue lenders.
The committee said it wanted to see meaningful changes before then and called on the Department for Business, Innovation and Skills to work far more closely with the OFT and FCA to identify and tackle those who do the worst harm to the poorest borrowers.
A spokesman for the OFT said the watchdog was disappointed that the committee had not recognised the constraints under which it operated, which included the ability to impose fines “only in very limited circumstances”.
He said: “Far from being timid, the OFT has taken strong, targeted action to tackle the areas of greatest risk to consumers. In the last financial year alone the OFT has revoked the licences of some of the UK’s largest credit brokers and debt management firms, and taken formal action in more than 85 other cases.”
Richard Lloyd, executive director of the consumer group Which?, said the report should serve as a final warning to lenders. “This is a damning verdict on the credit market and the OFT’s failure in the past to step in and protect consumers. It underlines once more why a crackdown is urgently needed to tackle unscrupulous high-cost lenders,” he said.
“We are encouraged by the OFT’s recent, tougher approach but there must be no further delay in taking action – starting with a ban on excessive fees and charges, and stricter rules on affordability checks.”