A Guide to the Evolution of Payday Loans – Are they Fit to Survive? – Chapter 4

If you’ve taken out a payday loan online recently, you should know what Continuous Payment Authority is. This is because lenders make it very clear during the application process. But it wasn’t always like this. Find out about the past misuse of CPA with and how it affects today’s industry with Quick Loans Express.

In this chapter, we’ll consider changes in the payday loan industry since 2013. You’ll be able to learn information about:

Story Highlights:

OFT comments on the misuse of CPA
FCA regulations about CPAs
Whether CPAs are still being abused
Identity Fraud & CPAs
How criminals fraudulently received payday loans
Who was to blame for fraudulent payday loans
Identity theft & short-term loans nowadays

What is CPA (Continuous Payment Authority)?

Continuous Payment Authorities (CPA) are payment mechanisms involving a credit or debit card. It allows businesses to take regular payments from a customer’s bank account. The business takes the payments according to the terms mutually agreed upon without having to seek authority for each payment. Used correctly, they’re very convenient for customers since they allow payments to be made on time. In addition, there is no need to rely on the customer having to remember the deadlines or due dates.

In this article, we will consider the problems (past and present) of identity theft and the payday loan industry. But before that, we’ll look at one of the other most common complaints about payday loan companies before the FCA took over regulating the industry. This was the misuse of CPA. Let’s explain briefly what they are before highlighting the problems their misuse caused.

The problem that OFT found in their March 2013 report ‘Payday Lending – Compliance Review Final Report’ was that some firms in the payday loan industry were misusing these CPAs. What exactly were they doing?

The OFT Comments on Misuse of CPA

One problem OFT found with CPAs was that often money to repay the quick payday loan was taken ahead of other essential debts such as rent, Council Tax, etc. Even when lenders found insufficient money in the borrower’s account, this wasn’t the end of the matter. They would frequently take a part-payment over several days leaving the customer facing severe financial hardship. By taking small and frequent payments, the customer wouldn’t have enough money to pay their daily expenses, such as groceries or transport costs.

The other major problem referred to how much borrowers were aware of what they were agreeing to when signing up for a payday loan. Not fully understanding the terms and conditions of their short-term loan bad credit meant that some customers didn’t even know that they’d agreed to the use of a CPA. Of the 50 firms which took part in the OFT survey, 28 failed to explain the way a CPA worked or informed the borrower of their right to cancel it.

FCA Regulations about Continuous Payment Authority

When the FCA took over overseeing the short-term loan industry, they made rules to prevent this misuse of CPA. As part of the legislation they implemented, a payday loan provider was no longer able to unsuccessfully use a CPA to receive payment more than twice. After two unsuccessful attempts, they had to contact the borrower. Also, they were no longer allowed to take different amounts without the consent of the bank account holder. This meant they couldn’t clear out people’s bank accounts when trying to recoup some of the money which they owed them.

Are CPAs still being Abused?

This piece of FCA legislation about CPAs has had an enormous impact on people who receive payday loans. In their August 2016 research, Citizens Advice found no evidence of lenders misuse of CPA. StepChange reached a similar conclusion in a report released three months later.

The way that the payday loan industry functions it helps that potential borrowers are presented with all the facts before they enter into a loan agreement. They’re informed by reputable lenders of their obligations and rights beforehand. In the past, OFT had found that lenders did not provide borrowers with all the necessary pre-contract information about their loan as they are today. Therefore, if they do agree to the use of a CPA, withdrawals from their bank account aren’t a total surprise. They’re also notified of the right to cancel it.

Identity Fraud & CPAs

Another concern that the OFT highlighted in their report was the increasingly high incidence of identity fraud committed during applications for instant payday loans in the period up to 2013. The issue had become such a matter for concern that Action Fraud had issued an official warning in January 2013 advising consumers to keep a vigilant eye on their bank transactions for fraudulent payments. Often the first indication that consumers had been the victim of identity theft was the misuse of CPA from their bank account to repay a loan they’d never applied for.

How did Criminals Fraudulently Receive Payday Loans?

The OFT pointed out the two ways lenders granted fraudsters with payday loans by using identity theft.

  1. Use a stolen identity to open an account and then apply for a loan
  2. Receive a loan but give details of someone else’s debit card for the repayments

The OFT found cases of money being paid into a bank account which had a different name to the loan applicant. The lender did not pick up this discrepancy. Surely checking that the name on the bank account was the same as the applicant should have been one of the most crucial pieces of information that they should have checked?

Who Was to Blame for Fraudulent Payday Loans?

The OFT believed that the problem was another example of inadequate checks being performed on applicants for short-term loans especially when the application was made online. They commented that if identity checks had been more vigorous, then fraudsters wouldn’t have been able to do this so often. In August 2012, they’d even revoked the licence of the online loan company, MCO Capital Ltd. They also fined them over half a million pounds partly for their failure to carry out stringent identity checks on loan applicants. This case of misconduct lead to 7,000 instances of loans being paid out fraudulently.

Their other complaint was that victims of identity theft often had to go to extraordinary lengths to prove to the payday loan company that they hadn’t been the recipient of the loan. In the meantime, debt collectors pursued them.

Identity Theft & Short-Term Loans Nowadays

The reduction in the number of fraudulent payday loans is partly due to the fact that consumers nowadays are more savvy about the risks of identity theft. Therefore, they are more vigilant about protecting their personal details. Before 2013, identity theft was less common. Many consumers didn’t know how they could inadvertently expose themselves to risk. Fraudsters are becoming more sophisticated in their methods, however. Rather than using someone else’s debit card, often identity theft nowadays is the direct result of unauthorised access to their personal details. Hackers will obtain these using malicious software or phishing techniques etc.

There is another reason why identity theft is detected more often. In the payday loan industry in general, lenders are more thorough when checking borrowers’ details. This is especially when they apply online. Lenders often ask for collaborative documentation as proof they’re dealing with the right person or using follow-up phone calls. They also check with fraud protection agencies. This flags up discrepancies between different short loan applications. Trained personnel run multiple and sophisticated checks on all applications for possible signs of fraud.

This doesn’t mean that it doesn’t happen, but rather that the chances are less likely. Between 2012 and 2013, such a gang infiltrated Wonga. They were able to make successive applications, using the same password. In the end, Wonga granted the gang thousands of loans. However, the risk of this happening is much lower because of better security technology and increased vigilance.

Misuse of CPA Now

Both FCA regulations and better-informed borrowers have contributed to the misuse of CPA no longer being a matter for concern in the payday lending market.

Identity theft is still an issue. However, in an electronic world, this doesn’t only affect the payday industry. It affects any company which uses computers for their business dealings. However, the utilisation of checking – both of affordability and identity – make the possibility of widespread fraudulent loan applications using stolen identities less likely.

Crystal Evans
Crystal is a Web Content Manager with a passion for helping others. A Marketing Specialist by trade, Crystal’s first job was in the financial sector and she has been adding verve to personal finance ever since! When in high school, Crystal enjoyed creating revision notes and study aids for her peers – making concepts Crystal Clear. She continues this practice in the post-university School of Life – channelling her love of sharing information into blogging about personal finance

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* Warning: Late repayments can cause you serious money problems. For help, go to moneyhelper.org.uk.