Payday loan firms given 12 weeks to switch or be put out of business but ministers block cap on sky-high interest rates, Daily Mail Online

By Matt Chorley and Gerri Peev for the Daily Mail 00:52 GMT 06 Mar 2013, updated Nineteen:11 GMT 06 Mar 2013

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  • Controversial industry faces unlimited fines for cracking fresh rules
  • But firms will escape statutory cap of their rates
  • Millions turned to fresh loan companies after credit from banks dried up

Payday loan companies are to escape a cap on exorbitant interest rates, but will face unlimited fines for cracking fresh rules under a government clampdown

Britain’s 50 fattest payday loan companies have been told they have 12 weeks to improve their behaviour or they will be shut down.

Powerful watchdog the Office of Fair Trading said it had uncovered ‘widespread irresponsible lending’ in an industry where interest rates can top Four,000 per cent a year.

It has now reported the ‘deep-rooted problems’ to the Competition Commission.

The 50 lenders account for 90 per cent of the market and are accused of failing to conform with the standards expected.

The investigation found that while the firms advertise short-term loans to help people for a few days until they are next paid, up to half of their income comes from long-term loans when people get into financial trouble.

If they fail to clean up their act in three months they risk losing their license to operate in the £2billion industry.

But consumer groups urged even tougher activity, telling the worst companies should be shut down instantaneously.

However, the government is under fire for refusing to cap the level of interest rates that the firms can charge.

They will face unlimited fines for cracking fresh rules under a government clampdown of the controversial industry.

But the firms – dubbed legal loan sharks – will escape a statutory cap of their rates amid claims that it would only drive desperate families into the arms of overseas lenders.

Millions of families have turned to fresh loan companies after credit from banks dried up in the wake of the recession.

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But critics say some firms run by ‘cowboys’ are exploiting vulnerable consumers with their extortionate interest rates.

The OFT It said that, despite payday loans being described as one-off, short-term loans costing an average of £25 per £100 for 30 days, up to half of payday lenders’ revenue comes from loans which last longer and cost more because they are spinned over or refinanced.


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OFT chief executive Clive Maxwell said: ‘We have found fundamental problems with the way the payday market works and widespread breaches of the law and regulations, causing misery and hardship for many borrowers.

‘Payday lenders are earning up to half their revenue not from one-off loans, but from spinned over or re-financed deals where unexpected costs can rapidly climb on up.

‘Irresponsible lending is not restrained to a few rogue payday lenders – it is a problem across the sector. If we do not see rapid, significant improvements by the 50 lenders we investigated, they risk their licences being liquidated.’

The Treasury and Department for Business has also unveiled more protection for customers. A fresh watchdog, the Financial Conduct Authority, will come into force next year and will have the power to impose unlimited fines and get consumers’ money back if rules are breached.

The Government will also today publish a probe from the University of Bristol which will lay naked the harm caused by payday lenders while also dismissing the practicalities of imposing a cap.

The Mail understands the independent report will say that a cap on interest rates would drive consumers to seek loans from firms based abroad.

But a consultation on the powers of the fresh watchdog will not rule out permitting it to impose a cap on interest rates in future.

The Government has announced that payday lenders will face fresh rules on how they advertise.

Some lenders are already accused of targeting parents by advertising during children’s TV programmes.

Consumer minister Jo Swinson said: ‘“What is needed is stronger regulation of this market, where there have been so many problems found, and unscrupulous behaviour by a range of lenders.

‘We recognise that stronger powers are needed to crack down on unscrupulous behaviour, and that’s why we’re transferring the consumer credit regulations to the Financial Conduct Authority.

‘That’s going to be a bod that has much stronger powers to be able to ban certain products, to be able to stop lenders coming in the market if they can’t prove they have a sound business model and they’re going to act responsible.

‘They also have the power if necessary to set an interest rate cap – albeit the evidence at the moment doesn’t point to that being the best solution, because actually some of the thickest problems are things like not having decent affordability assessments done, so that people who should be getting debt advice end up getting more debt instead.’

The industry will face thresholds on the number of adverts in an hour, the times they advertise and will have to make clear that their APR – their annual interest rate – is decently displayed.

Lenders will also be made to confidentially share data on applications so people can’t take out several loans at once from different companies.

Gillian Dude, chief executive at national charity Citizens Advice said: ‘Payday loans are proving toxic for many people. Unscrupulous lenders are ramping up costs when customers can’t afford to repay, and are emptying bank accounts to claw back loans, leaving people without a penny to their name.

‘What’s worrying is that these loans are often given without decent credit checks, so too many people are given loans they won’t realistically be able to pay back.

‘For too long this industry has acted as a law unto itself. So it is good to see the OFT planning to eliminate the licences of lenders who do not improve within the 12 week deadline. But to truly protect consumers, lenders who are still found guilty of flouting guidelines must be stopped from trading straight away.’

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Millions of families have turned to fresh loan companies after credit from banks dried up in the wake of the recession

Economic Secretary to the Treasury, Sajid Javid, said: ‘Consumers can have greater confidence that the fresh FCA will intervene early and decisively in their interests – thanks to its more focused remit, objectives and powers.’

Payday loan bosses have previously dismissed complaints about their gigantic interest rates, arguing that most consumers take out the loans for a only brief time and that they are packing a gap in the market.

Government sources said that ministers are determined to bring the industry to book and will make sure that it fully obeys the law and codes of practice already in place.

Other countries do restrict payday lenders’ interest rates.

Australia has imposed a 48 per cent annual interest rate cap on its industry while 35 American states have thresholds on fees and interest rates. Payday lenders in Canada can charge interest at up to 60 per cent a year.

Some campaigners say a cap on interest rates alone would be a blunt instrument and make it so unprofitable that some customers would turn to illegal loan sharks.

Instead, they have called for a cap on the total cost of a loan, so that people who are compelled to roll over their debt into a longer-term loan do not face crippling costs.

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