A Guide to the Evolution of Payday Loans – Are they Fit to Survive? – Chapter 8

The 2013 OFT Report was a turning point in the payday loans industry. In this article, find out why and how with Quick Loans Express.

In this chapter, we’ll look at what actions the OFT recommended and reactions to the report from different organisations:

Story Highlights:

Steps to be taken – notifying unacceptable payday lenders
Punishment of non-compliant lenders; continuing investigations Cooperation with other bodies
Reactions to the OFT report
How far criticisms of the OFT were justified
What happened to payday loan companies warned by OFT
Paving the way for the FCA
Using the OFT findings to regulate (April 2014)
The contribution of the CMA
The role of short-term lenders’ trade associations and the Consumer Finance Association’s reaction to the OFT report; further voluntary measures by the CFA

The OFT report was a compliance review of the payday lending industry. It concluded with some actions which they needed to implement in light of their findings. In this chapter, we explain what happened after the release of the report and how different organisations reacted to it. Finally, we examine how many of their recommendations were put into effect. Did it achieve anything or was the report filed away and ignored?

OFT Report: Actions to be Taking

The OFT emphasised the fact that ensuring the compliance of the payday lending market with existing legislation was a priority for them. They were committed to using all their powers at their disposal to improve the standards in the industry. If necessary, then they would remove lenders whose actions made them unfit to remain in the market.

Their list of proposed future actions was as follows.

Notifying Unacceptable Payday Lenders

OFT said that they notified 50 lenders (making up 90% of the market) of the need to take immediate steps to address the areas of non-compliance. They had 12 weeks to prove that they were making changes. If they failed to cooperate, then they risked losing their licence. They had written to every lender saying that they had to act immediately to ensure they were meeting the standards expected of them.

Punishment of Non-Compliant Lenders

OFT had already revoked the licence of one lender and had imposed formal restrictions on three others. Two of the four decisions were subject to appeal. They made it clear that they would name any lenders who had sanctions imposed on them once the enforcement action was complete. They also said they would publish the results of any formal actions taken against individual payday loan companies on their website.

Continuing Investigations of Payday Lenders

OFT emphasised that the formal investigation wasn’t over. They were still carrying out their enquiries with more enforcement action in the pipeline. With the cooperation of partners such as debt advisory agencies, they were continuing to gather evidence to support their accusations of noncompliance and other types of poor business practices. They would continue to monitor all firms.

Cooperation with Other Bodies

OFT said that they would work closely with the FCA. This was so that when regulation passed down to them in April 2014, then new rules would come into effect to ensure that the payday loan market functioned properly.

Apart from close cooperation with the FCA, they said that they had provisionally referred the payday lending market to the Competition Commission (later known as the CMA) for a full investigation. They believed that the Commission would be able to undertake a detailed analysis of how the market worked. They would hopefully clearly define any problems with competition and identify lasting solutions which would get to the heart of underlying problems.

The powers of the Competition Commission were broad. They could impose remedies directly (which would have the force of law). Alternatively, then they could recommend that other bodies carry out any reforms. These remedies might be requiring firms to provide consumers with better information. Or, they could be as severe as an intervention which would ban or limit certain features of the financial product or market.

OFT said that they, the Financial Conduct Authority (FCA) and Competition Commission would work together to make changes to the market regulations. They would determine whether the FCA should use its power to cap the cost or duration of credit once they became responsible in 2014.

Reactions to the OFT Report

Generally, the reactions to the OFT report into the payday lending market can be summed up with the phrase: ‘And about time too’. There was a general feeling that OFT had acted a little too late. They’d allowed the blatant disregard for the rules among many payday lenders to go on for far too long.

A Public Accounts Committee meeting in May 2013 was particularly scathing of the Office of Fair Trading as a regulatory body. Their criticisms of the OFT were:

  • It doesn’t have enough information on lenders to regulate effectively.
  • It lacks understanding of how people use consumer credit and the harm they suffer if firms don’t comply with regulations.
  • It’s too passive and timid.
  • It’s under-resourced.
  • Its regulations don’t address the poor practices of some credit providers.

Even when commenting on the recommendations of their report, then their reaction was a barely-suppressed cynical disbelief that anything would change. The phrase they used was ‘We expect to hear of follow-up’ (with the suggestion that they wouldn’t).

How Fair Were the Criticisms of the OFT?

Just because some politicians were making political capital out of bad business practices in the payday lending market isn’t sufficient reason to dismiss the criticisms of the Public Accounts Commission out of hand. It could be true that the OFT was under-resourced. Therefore, it didn’t have the information to regulate the payday lending market. However, as a non-ministerial department, whose fault was this?

One of the main reasons for the delays in dealing with the high-cost short-term credit industry was that it was a relatively new phenomenon in the UK market. Besides, the abuses of the market weren’t immediately obvious. Moreover, investigating the industry isn’t something that you can do overnight. In fact, their investigation took over 12 months to complete and then collate the findings. The report itself illustrates that the OFT did possess an understanding of how consumers were being adversely affected by payday loans.

We should remember that the OFT had been originally created in 1973 as part of the Fair Trading Act to protect consumer rights in the UK and prohibit unfair practices. Think about how many fewer opportunities there were for credit at this time. Think of how the role of the OFT had expanded in over 40 years as the spending habits of Britons underwent enormous changes. No wonder they were ill-equipped to deal with the explosion in the size of the payday loan market.

What Happened to the Payday Loan Companies Warned by OFT?

In an update to their investigation into the payday lending market, then the OFT released a progress report. Inside there were details of what had happened to those companies in November 2013.

Of the 50 main lenders, then 19 had left the market. OFT had kept the investigations open into six other payday lenders. In addition, they had been reviewing detailed evidence against another 16. In addition to the 50 leaders in the market, three firms had had their licences revoked after their appeals had been dropped or dismissed. Another four lenders had surrendered their permits and were no longer lending.

OFT had kept their word when they warned that compliance in the payday lending market had become a priority for them.

Paving the Way for the FCA

The 2013 OFT report was instrumental in making regulation of the short-term loan market much easier once their regulatory powers were transferred to the FCA. With the research they’d carried out, their request for the involvement of the Competition Commission and recommendations from debt advisory services, they paved the way for the FCA.

The OFT had highlighted some causes for concern in their report. Firstly, they mentioned the excessive use of roll-overs. As well, they stated their concern for the misuse of CPAs. Another concern they raised was the misleading nature of both payday loan advertising and their websites for not giving borrowers the tools to make a well-informed decision. Even the implementation of a price cap was first suggested in their 2013 report.

How did the FCA use their findings when they took over in April 2014?

April 2014 – Using the OFT Findings to Regulate

Even if unscrupulous payday lenders hadn’t been warned off by the follow-up to the 2013 report and OFT’s continuing investigations, then the FCA made it clear that their stance would be as uncompromising. Even before they’d officially taken over regulatory duties, then the FCA Chief Executive, Martin Wheatley said in a statement in October 2013:

“We believe that payday lending has a place. Many people make use of these quick loans and pay off their debt without a hitch…Today I’m putting payday lenders on notice: Tougher regulation is coming, and I expect them all to make changes so that consumers get a fair outcome. The clock is ticking.”

Regulations preventing more than two roll-overs of loans; restrictions on the number of times a CPA could be unsuccessfully used and the inclusion of a risk warning and the prominent display of the loan’s APR were all changes made in only their first months as the regulatory body. It was evident that the FCA hadn’t been exaggerating when they said tougher regulations were coming. As a result of these changing realities of the short-term lending industry, then the FCA estimated that 38% of lenders left the market. An additional 58% of High Street stores stopped offering payday loans.

After consultations throughout 2014, then the FCA introduced the price cap. The cap into force less than a year after the FCA had become the regulatory body for the industry. This price cap had originally been recommended in the 2013 OFT report. The cap set interest rates at a maximum of 0.8% per day. Default charges can be no higher than £15 per loan. As well, no borrower can pay more than twice the amount they borrowed.

The Contribution of the CMA

The OFT had also referred the matter of the payday lending market to the Competition Commission at the completion of their 2013 report. This Competition Commission later became the CMA – The Competition & Markets Authority. What was their contribution to the regulation of the short-term loan industry? What did they recommend?

After a 20-month investigation, then the CMA released its findings in 2015. In it, they made a number of recommendations. They concentrated on issues to encourage competition in the marketplace and which would benefit the borrower. They included the importance of the FCA promoting lenders to share real-time data. This was so borrowers wouldn’t become over-indebted. Also, they called for increased transparency about lead generators. In this way, potential borrowers wouldn’t be misled into believing they were dealing with a payday lender directly.

The Payday Lending Market Investigative Order 2015 also stipulated that online lenders had to include details of their products on at least one price comparison site. They should also prominently display a hyperlink to this site on their website (effective from May 2017). Both online and high-street lenders were also required to provide customers with a summary of the total cost of their borrowing over the previous 12 months. Both of these measures came into effect to improve price competition in the marketplace. Consequently, this will encourage borrowers to shop around for the best possible instant payday loan (thereby saving money).

The Role Of Short-Term Lenders’ Trade Associations

In their 2013 report, then the OFT had also called on representative bodies of the payday loan industry to make a contribution to removing the poor business practices in their sector. They should do so by acting on the findings of their report. They asked them to show leadership to their members by:

  1. Reviewing their codes of practice.
  2. Working constructively with the OFT to help the industry raise its standards.
  3. Putting procedures in place for the effective and impartial monitoring of their codes.
  4. Disciplining members who didn’t comply with the rules.

How far did trade associations heed the call of the OFT for help in regulating the short-term lending market?

The CFA’s Reaction to the OFT Report

The Consumer Finance Association had introduced a Code of Practice for its members in November of 2012. However, this was too late to make much of a difference to the findings of the OFT report which was published only 4 months later. Their Code of Practice encompassed and exceeded the Good Practice Customer Charter. These are the minimum standards expected by the government to ensure consumers are treated fairly.

In light of the report, then the CFA set up an independent body in May 2013 to oversee the standards in the payday lending market. This body would also ensure that members complied with the industry’s Code of Practice. This SLCB (Short-Term Lending Compliance Board) was intended to identify gaps and deficiencies in the Code. It would also perform a thorough check of any lender applying for membership. It was also given the power to sanction members for non-compliance, expel them from the CFA if necessary. They could even refer them to the OFT (and later the FCA) for further investigation.

The Chairman of the SLCB, Seymour Fortescue, said that there would be zero tolerance for bad practices. They also said that their investigation would concentrate on four key issues:

  1. Ensuring proper credit appraisals were carried out
  2. Preventing repeat borrowing
  3. The transparency of charges
  4. The fair treatment of customers in financial difficulties.

Further Voluntary Measures by the CFA

Because of growing concerns about the nature of payday loan advertising, in November 2014 the CFA implemented some voluntary guidelines for the marketing and advertising of short-term loans. These guidelines addressed concerns about children watching ads for fast loans, the targeting of potentially vulnerable customers and the trivialising of debt. In light of further research, these guidelines were modified the following year.

In June 2015, the ASA independently formulated their own official rules for the industry. It’s positive that in this case, the industry was leading the way in self-regulating rather than playing ‘catch up’ after the intervention of a regulatory body. It is a prime example of how the sector has changed dramatically since 2013.

OFT Report: Conclusion

The OFT report can be seen a watershed in the short (but eventful) history of short-term loans in the UK for a number of reasons.

The first reason is that it showed that regulation could be tough if necessary. Far from being a ‘soft touch’, the OFT was clearly determined to put a stop to the poor business practices and unfair treatment of borrowers by the payday lending industry. With the FCA promising to be even tougher from the start, many lenders who were guilty of the most extreme examples of unacceptable business practices saw the writing on the wall and left the industry before they could be thrown out.

The other reason why the OFT report was so influential was that it laid the groundwork for the regulations which came into effect after its demise. Many of these were based on findings in their report or recommended by it. Other regulatory bodies (such as the CMA) and trade associations for the payday loan industry took on board the OFT’s ‘Need for Action’ directive. As a result, then many of the elements of the properly functioning system we see today are a direct result of the OFT investigation.

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Bryson Oakes
Bryson is the leading engine of the Quick Loans Express blog. He has worked in the financial industry for 15 years and is the go to man for all money-related tricks and tips. When he is not spreading the latest financial news, Bryson can be found playing cricket with his mates or running in the park with his dog.

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