OFT clamping down on payday lenders
The UK's biggest payday lenders have been threatened with being put out of business after a damning report into the industry uncovered evidence of "widespread irresponsible lending".
The Office of Fair Trading's (OFT) report is the culmination of a large-scale probe into the £2 billion payday sector, including spot checks on household names such as Wonga.
The regulator is handing the 50 biggest players a 12-week deadline to take "rapid action" and prove that they have cleaned up their act. Any firms which fail to co-operate will have their licences revoked, which they need in order to trade.
The watchdog is also proposing to refer the industry to the Competition Commission after finding "deep-rooted" problems such as lenders encouraging customers to roll over expensive loans and sink further into debt.
The OFT said the issues raised were industry-wide, causing "misery and hardship" for borrowers. Language used by lenders to reel in customers such as "Instant cash", "Loan guaranteed," and "No questions asked," could either be misleading or, if true, were a sign of irresponsible lending, it warned.
The Government is also moving to clamp down on the sector. Plans include limiting the number of adverts firms can put out per hour, the times they can advertise and forcing them to make sure that interest rates are clearly displayed.
Business minister Jo Swinson said payday loan advertisements must not "lure consumers into taking out payday loans that are not right for them", adding that payday lenders could also be forced to include "wealth warnings" in advertisements, informing consumers of the risks of borrowing money.
Wonga, whose annual percentage rate (APR) is advertised at 4,214%, said that it welcomes any attempt to encourage responsible lending.
A spokesman for Wonga said that the lender has been "instrumental" in helping to raise industry standards. He said that only 9% of Wonga loans are extended and they do not provide "anything like" the levels of revenue described for the whole of the industry by the OFT's report. "We have been a leader in best practice for short-term credit. We have over one million active customers," he added.
Gillian Guy, chief executive at Citizens Advice, said the charity has seen a huge increase in people struggling with payday loans. "While the adverts make them look like a quick fix, in reality lenders are handing out loans to people who can't afford to repay and rolling them over into huge, unmanageable debts," she said.